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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(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 the registrant as specified in its charter)
<TABLE>
<S> <C>
MICHIGAN 38-1414122
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
1266 E. MAIN STREET, FIFTH FLOOR, STAMFORD, 06902
CONNECTICUT (Zip Code)
(Address of principal executive offices)
</TABLE>
(203) 358-0294
Registrant's telephone number, including area code
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
Portions of the Proxy statement for the 1998 Annual Meeting of Shareholders
are incorporated by reference in Part III if filed by June 1, 1998.
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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 1997. The costs incurred for these
relocations were charged against the reserve for facilities closings during the
period. The total costs incurred were less than the amount accrued and as such a
credit for facilities closings and other was recorded during 1997 for $0.7
million.
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.
2
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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.
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 fiscal 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.
3
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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.
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.
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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.
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.
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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.
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>
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(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.
6
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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 OPENED DURING CLOSED OPEN AT END
YEAR ENDED OF YEAR YEAR DURING YEAR OF 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>
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>
<S> <C>
California.............................. 4 New Hampshire........................... 2
Colorado................................ 4 New Jersey.............................. 5
Connecticut............................. 2 New York................................ 6
Illinois............................... 11 North Carolina.......................... 2
Indiana................................. 5 Ohio................................... 11
Kansas.................................. 1 Oregon.................................. 1
Kentucky................................ 2 Pennsylvania............................ 9
Maryland................................ 5 Rhode Island............................ 1
Massachusetts........................... 3 Tennessee............................... 5
Michigan............................... 20 Virginia................................ 4
Minnesota............................... 3 Wisconsin............................... 5
Missouri................................ 4
</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.
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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.
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.
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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.
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).................................................. $ 1,455 $ (3,547) $ (3,388) $ (4,314)
February 1, 1997...................................................... 2,548 (1,592) (275) 1,656
</TABLE>
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(1) The net loss in the second quarter of 1997 included a credit to the
provision for facilities closing and other of $703.
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
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<PAGE>
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.
(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.
10
<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".
11
<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......... (38,343) (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............................................. 703 -- 944 1,085 (29,254)
Operating income (loss)............................. (8,068) 4,669 6,276 2,845 (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............................................ (10,409) 2,337 3,719 959 (48,691)
Net income (loss) before extraordinary item and
income tax........................................ (10,409) 2,337 3,719 959 (47,514)
Extraordinary item.................................. -- -- -- 1,628 --
Net income (loss) before income taxes............... (10,409) 2,337 3,719 2,587 (47,514)
(Provision) benefit for income taxes................ 615 -- -- -- 4,450
Net income (loss)................................... $ (9,794) $ 2,337 $ 3,719 $ 2,587 $ (43,064)
---------- ---------- ---------- ---------- ----------
PER SHARE DATA***
Net income (loss) per share (basic and diluted)
before extraordinary item......................... $ (1.30) $ 0.31 $ 0.55 $ 0.36 $ (16.58)
Extraordinary item.................................. -- -- -- 0.61 --
Net income (loss) per share (basic and diluted)..... $ (1.30) $ 0.31 $ 0.55 $ 0.97 $ (16.14)
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA
Total assets........................................ $ 65,194 $ 65,858 $ 68,410 $ 95,983 $ 125,611
Working capital..................................... $ 34,531 $ 29,240 $ 23,626 $ 53,780 $ 82,706
Long-term obligations............................... $ 27,398 $ 11,940 $ 12,395 $ 66,981 $ 104,715
Shareholders' equity................................ $ 21,680 $ 31,295 $ 28,763 $ 5,181 $ 2,594
---------- ---------- ---------- ---------- ----------
FINANCIAL RATIOS AND OTHER DATA
Current ratio....................................... 3.1 2.3 1.9 3.3 5.5
Return (loss) on average assets..................... (14.9)% 3.5% 4.5% 2.3% (36.0)%
Return (loss) on average shareholders' equity....... (37.0)% 7.8% 21.9% 66.5% (178.6)%
Book value per share at year end.................... $ 2.87 $ 4.14 $ 3.80 $ 1.94 $ 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>
- --------------------------
* Because the costs incurred in relocating the Company's merchandising
operations, distribution center and other corporate offices in 1997 were
less than the amount accrued, a $.7 million credit for facilities closings
and other was recorded in 1997.
** 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.
**** 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.
12
<PAGE>
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 1995-1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales.................................................... 100.0% 100.0% 100.0% (12)% (4)%
Cost of sales (including buying, distribution and occupancy
costs)..................................................... (84.7) (79.7) (78.8) (7) (3)
--------- --------- ---------
Gross income............................................... 15.3 20.3 21.2 (34) (9)
Selling, general and administrative expense.................. (23.7) (20.3) (20.7) 3 (7)
Finance charge and other revenue............................. 3.0 2.6 2.3 2 6
Credit for facilities closings and other..................... 0.4 -- 0.5 -- (100)
--------- --------- ---------
Operating income (loss).................................... (5.0) 2.6 3.3 (273) (26)
Interest expense............................................. (1.4) (1.3) (1.2) -- 2
--------- --------- ---------
Income (loss) before reorganization items and income taxes... (6.4) 1.3 2.1 (545) (42)
--------- --------- ---------
Reorganization items:
Professional fees.......................................... -- -- (0.3) -- (100)
Interest earned on accumulating cash from Chapter 11
proceedings.............................................. -- -- 0.1 -- (100)
--------- --------- ---------
-- -- (0.2) -- (100)
--------- --------- ---------
Income (loss) before income taxes............................ (6.4) 1.3 1.9 (545) (37)
Income taxes................................................. 0.4 -- -- -- --
--------- --------- ---------
Net income (loss)............................................ (6.0)% 1.3% 1.9% (519) (37)
--------- --------- ---------
--------- --------- ---------
</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 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
$936,000 from 1996 to 1997. The increase was primarily due to the moving costs
associated with the relocation of the Company's
13
<PAGE>
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 23.7% 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 1997, the Company recorded a credit for facilities closings and other
of $0.7 million. During 1997, the Company completed the relocation of its
corporate offices and distribution center facilities for less than the amounts
accrued.
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 5.9% 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 $9.8 million, or $1.30 per share, in
1997 compared to net income of $2.3 million, or $0.31 per share, in 1996. The
net loss for 1997 includes a credit for facilities closing and other of $0.7
million.
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
offset by an increase in vendor allowances received, higher markups and lower
net merchandise costs incurred in 1996 compared to 1995.
14
<PAGE>
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.
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 $2.3 million, or $0.31 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.
15
<PAGE>
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.
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
16
<PAGE>
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 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.
17
<PAGE>
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, 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 26 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company will be set forth under
the caption "VOTING SECURITIES AND PRINCIPAL HOLDERS" and under the caption
"ELECTION OF DIRECTORS" in the Company's Proxy Statement in connection with the
1998 Annual Meeting of Shareholders scheduled to be held June 18, 1998, and is
incorporated herein by reference. Information concerning compliance with Section
16(a) of the Securities Exchange Act of 1934 will be set forth under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement in connection with the 1998 Annual Meeting of Shareholders and is
incorporated herein by reference if filed by June 1, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information as of April 24, 1998, regarding
the Company's executive officers:
<TABLE>
<CAPTION>
EXECUTIVE
NAME AGE POSITIONS WITH THE COMPANY OFFICER SINCE
- ------------------------------ --- ---------------------------------------------------------------- ---------------
<S> <C> <C> <C>
Arlene H. Stern............... 47 President, Chief Executive Officer and a Director 1996
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>
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 Women's Specialty
Retailing 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. Pursuant to
a letter agreement, dated July 8, 1996, Ms. Stern is to be employed as the
Company's President and Chief Executive Officer until July 7, 1999, unless her
employment is terminated earlier pursuant to the letter agreement.
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
19
<PAGE>
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, 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.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be set forth under the
caption "EXECUTIVE COMPENSATION" in the Company's Proxy Statement in connection
with the 1998 Annual Meeting of Shareholders and, except for the information
under the caption "BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION" or "PERFORMANCE GRAPH", is incorporated herein by reference if
filed by June 1, 1998.
20
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of certain beneficial owners
and management will be set forth under the caption "VOTING SECURITIES AND
PRINCIPAL HOLDERS" and "ELECTION OF DIRECTORS" in the Company's Proxy Statement
in connection with the 1998 Annual Meeting of Shareholders and is incorporated
herein by reference if filed by June 1, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will be
set forth under the caption "CERTAIN TRANSACTIONS" or "EXECUTIVE
COMPENSATION--COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in
the Company's Proxy Statement in connection with the 1998 Annual Meeting of
Shareholders and is incorporated herein by reference if filed by June 1, 1998.
21
<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 26 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 26 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" on pages 44 to 47 of 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.
22
<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.
Date: April 29, 1998
<TABLE>
<S> <C> <C>
GANTOS, INC.
(Registrant)
By: /s/ ARLENE H. STERN
-----------------------------------------
Arlene H. Stern
ITS: PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------- -------------------------- -------------------
<C> <S> <C>
President and Chief
/s/ ARLENE H. STERN Executive Officer
- -------------------------------- (Principal Executive April 29, 1998
Arlene H. Stern Officer)
Senior Vice President,
/s/ DAVID C. NELSON Chief Financial Officer
- -------------------------------- (Principal Financial April 29, 1998
David C. Nelson Officer)
/s/ JEFFREY C. TUORI
- -------------------------------- Controller (Principal April 29, 1998
Jeffrey C. Tuori Accounting Officer)
/s/ L. DOUGLAS GANTOS
- -------------------------------- Chairperson of the Board April 29, 1998
L. Douglas Gantos
/s/ ELIZABETH M. EVEILLARD
- -------------------------------- Director April 29, 1998
Elizabeth M. Eveillard
/s/ FRED K. SCHOMER
- -------------------------------- Director April 29, 1998
Fred K. Schomer
/s/ HANNAH H. STRASSER
- -------------------------------- Director April 29, 1998
Hannah H. Strasser
/s/ MARY ELIZABETH BURTON
- -------------------------------- Director April 29, 1998
Mary Elizabeth Burton
/s/ ERWIN A. MARKS
- -------------------------------- Director April 29, 1998
Erwin A. Marks
/s/ S. AMANDA PUTNAM
- -------------------------------- Director April 29, 1998
S. Amanda Putnam
</TABLE>
23
<PAGE>
GANTOS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants, Price Waterhouse 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-19
Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts........................................................... F-20
</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.
PRICE WATERHOUSE LLP
Battle Creek, Michigan
April 30, 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....... (38,343) (37,407) (40,018)
Finance charge and other revenue.................. 4,843 4,732 4,472
Credit for facilities closings and other.......... 703 -- 944
----------- ----------- -----------
Operating income (loss)........................... (8,068) 4,669 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.................................... (10,409) 2,337 3,998
----------- ----------- -----------
Reorganization items:
Professional fees............................... -- -- (530)
Interest earned on accumulating cash from
Chapter 11 proceedings........................ -- -- 251
----------- ----------- -----------
-- -- (279)
----------- ----------- -----------
Income (loss) before income taxes................. (10,409) 2,337 3,719
(Provision) benefit for income taxes.............. 615 -- --
----------- ----------- -----------
Net income (loss)................................. $ (9,794) $ 2,337 $ 3,719
----------- ----------- -----------
----------- ----------- -----------
Net income (loss) per share (basic and diluted)... $ (1.30) $ 0.31 $ 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....................................................... -- 1,567
----------- -----------
Total current liabilities........................................................... 16,116 22,623
----------- -----------
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) (9,579)
----------- -----------
Total shareholders' equity.......................................................... 21,680 31,295
----------- -----------
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)................................................................. $ (9,794) $ 2,337 $ 3,719
--------- --------- ---------
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Reorganization items............................................................ -- -- 279
Credit for facilities closings and other........................................ (703) -- (944)
Cash used for facilities closings and other..................................... (864) (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............................................................. (3,451) 3,754 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 --
Net borrowings (repayments) under revolving credit notes payable.................. 19,577 (101) (711)
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 $ (15,635) $ 5,181
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 $ (11,916) $ 28,763
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............................... -- -- -- 2,337 2,337
----- --- ----------- ------------ -------------
Balance February 1, 1997.............................. 7,563 $ 76 $ 40,798 $ (9,579) $ 31,295
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................................. -- -- -- (9,794) (9,794)
----- --- ----------- ------------ -------------
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.
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 $9.8 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.
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.
F-7
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
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
F-8
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
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
F-9
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RESERVE FOR FACILITIES CLOSINGS: (CONTINUED)
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 was unsuccessful in renegotiating its office and
distribution center lease with its former landlord (See Note 9) and elected to
reject the lease in its bankruptcy proceedings. As a result, the Company
reallocated $7.8 million of the remaining reserve to cover the anticipated costs
of rejecting the lease and relocating the corporate office and distribution
center.
During 1995, the Company settled the remaining disputes with its landlords
for less than the amounts accrued and reversed the reserve by $0.9 million,
which is recorded as a credit for facilities closing and other. During 1994, the
Company negotiated favorable lease terms with its landlords on many of the
remaining underperforming stores. As a result, the reserve was reduced by $1.8
million, which was recorded as a credit for facilities closing and other.
In addition, during 1994, the Company entered into settlement agreements
with certain of its creditors whereby early cash payments for approximately 25%
of their legally allowed claim were made as full settlement of the Company's
obligation, which resulted in a $1.6 million reduction in the reserve for
facilities closing and other. This amount, which was treated as forgiveness of
debt, and was included as an extraordinary gain in the Company's Statements of
Income during 1994.
During 1997, the Company completed the relocation of its distribution
center, financial and support functions to another facility in Grand Rapids,
Michigan, as well as the establishment of a merchandising office in Stamford,
Connecticut. The costs incurred were charged against the reserve for facilities
closings. The total costs incurred were less than the amount accrued and as
such, the accrual was reduced by $0.7 million, which was recorded as a credit
for facilities closing and other in 1997.
F-10
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RESERVE FOR FACILITIES CLOSINGS: (CONTINUED)
The following table sets forth the facilities closing provision established
in 1993 and the related subsequent activity:
FACILITIES CLOSING PROVISION
<TABLE>
<CAPTION>
NON-CASH
COSTS AND
PROVISION CASH COSTS ASSET RESERVE AT
RECORDED INCURRED WRITE-OFFS OTHER FEB. 3, 1996
----------- ----------- ----------- --------- ------------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Lease rejection costs.............................. $ 14,590 $ (4,592) $ (5,914) $ (4,084) $ --
Asset write-offs................................... 10,420 -- (9,703) 163 880
Inventory disposition costs........................ 3,514 (1,980) (19) (1,515) --
Other.............................................. 730 (1,270) 927 1,150 1,537
----------- ----------- ----------- --------- ------------
$ 29,254 $ (7,842) $ (14,709) $ (4,286) $ 2,417
----------- ----------- ----------- --------- ------------
----------- ----------- ----------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
NON-CASH
RESERVE AT COSTS AND
FEB. 3, CASH COSTS ASSET RESERVE AT
1996 INCURRED WRITE-OFFS OTHER FEB. 1, 1996
----------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Lease rejection costs.............................. $ -- $ -- $ -- $ -- $ --
Asset write-offs................................... 880 -- (841) (39) --
Inventory disposition costs........................ -- -- -- -- --
Other.............................................. 1,537 (9) -- 39 1,567
----------- ----------- ----------- --------- ------------
$ 2,417 $ (9) $ (841) $ -- $ 1,567
----------- ----------- ----------- --------- ------------
----------- ----------- ----------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
NON-CASH
RESERVE AT COSTS AND RESERVE AT
FEB. 1, CASH COSTS ASSET JAN. 31,
1996 INCURRED WRITE-OFFS OTHER 1996
----------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Lease rejection costs.............................. $ -- $ -- $ -- $ -- $ --
Asset write-offs................................... -- -- -- -- --
Inventory disposition costs........................ -- -- -- -- --
Other.............................................. 1,567 (864) -- (703) --
----------- ----------- ----------- --------- ------------
$ 1,567 $ (864) $ -- $ (703) $ --
----------- ----------- ----------- --------- ------------
----------- ----------- ----------- --------- ------------
</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
F-11
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. VALUATION OF LONG-LIVED ASSETS: (CONTINUED)
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.
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,
F-12
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LONG TERM DEBT: (CONTINUED)
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 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 March 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.
F-13
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LONG TERM DEBT: (CONTINUED)
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 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 fiscal 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.
8. INCOME TAXES:
For each of the years presented, the effective tax rate 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 the reversal of previously recorded valuation
allowances during the year for other deferred tax items.
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.
F-14
<PAGE>
GANTOS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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 $ 5,870
Reserve for facility closings..................... -- 530
Tax credit carryforward........................... 3,520 3,520
Other accrued expenses............................ 1,710 1,750
Property and Equipment............................ 960 740
Other............................................. 160 280
-------------- --------------
Deferred tax assets............................. 15,930 12,690
-------------- --------------
Inventory......................................... (930 ) (1,470 )
Prepaid expenses.................................. (680 ) (630 )
Property taxes.................................... (530 ) (530 )
-------------- --------------
Deferred tax liabilities........................ (2,140 ) (2,630 )
-------------- --------------
Subtotal.......................................... 13,790 10,060
Valuation allowance............................... (13,790 ) (10,060 )
-------------- --------------
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 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).
F-15
<PAGE>
GANTOS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. LEASES: (CONTINUED)
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.
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
F-16
<PAGE>
GANTOS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS: (CONTINUED)
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-17
<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).............................................. $ (10,234) $ 1,677 $ 3,173
Net income (loss) per share (basic and diluted)................ $ (1.36) $ 0.22 $ 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>
F-18
<PAGE>
GANTOS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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 (3,547) (3,388) (4,314)
Net Income (Loss) per share (basic and diluted)..................... 0.19 (0.47) (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) 1,656
Net Income (Loss) per share (basic and diluted)..................... 0.34 (0.21) (0.04) 0.22
</TABLE>
Because the costs incurred in relocating the Company's merchandising
operations, distribution center and other corporate offices in 1997 were less
than the amount accrued, a $.7 million credit for facilities closings and other
was recorded in the second quarter of 1997.
F-19
<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 END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS 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-20
<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.
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, dates 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DOCUMENT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
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.
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 Trademarks, 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DOCUMENT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
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.), incorporated 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.).
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.).
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.).
*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 Boudreaux,
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DOCUMENT
NUMBER DESCRIPTION
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<C> <S>
10.31 Letter Agreement, dated as of February 13, 1998, between Gantos, Inc. and PaineWebber Incorporated.
23.1 Consent of independent accountants.
27.1 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 4.3
GANTOS, INC.
AND
STATE STREET BANK AND TRUST COMPANY
-------------------------------------------------
SUPPLEMENTAL INDENTURE NO. 1 TO INDENTURE
Dated as of April 1, 1995
-------------------------------------------------
SERIES A PROMISSORY NOTES
SERIES B PROMISSORY NOTES
Dated as of December 15, 1997
<PAGE>
SUPPLEMENTAL INDENTURE NO. 1
Supplemental Indenture No. 1 (the "Supplemental Indenture"), dated
as of December 15, 1997, between Gantos, Inc., a Michigan corporation (the
"Company"), and State Street Bank and Trust Company, a national banking
association and successor to Fleet Bank N.A. (successor to Shawmut Bank
Connecticut, National Association, a national banking association) (the
"Trustee").
RECITALS
A. The Company and the Trustee are the parties to the Indenture,
dated as of April 1, 1995 between Company and Trustee, as successor trustee
(the "Indenture").
B. The Company has been in violation of financial covenants
contained in the Indenture since November 1, 1997, and the parties to this
Supplemental Indenture desire to eliminate certain of the financial covenants
in the Indenture for the third fiscal quarter of 1997, and to revise such
financial covenants, in exchange for a cash payment by the Company for the
benefit of the Holders of the Notes.
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH, for and in
consideration of the premises, it is mutually agreed and consented, for the
equal and proportionate benefit of the respective Holders from time to time
of the Notes as follows:
1. CAPITALIZED TERMS. Capitalized terms used in this
Supplemental Indenture and not defined in this Supplemental Indenture have
the meanings given them in the Indenture.
2. ELIMINATION OF COVENANTS. Effective on the Effective Date,
Sections 6.12(c) and (d) of the Indenture are eliminated from, and shall not
apply to, the Indenture or the Notes with respect to the third fiscal quarter
of the Company's 1997 fiscal year.
3. ADDITIONAL DEFINITIONS. Effective on the Effective Date, the
following definitions are added to Section 1.01 of the Indenture in their
applicable alphabetical order:
"ADJUSTED INTEREST EXPENSE:
The term "Adjusted Interest Expense" shall mean, for any
period, the greater of (a) zero and (b) Interest Expense for such
period, less, the amount by which (i) Interest Expense for such
period attributable to the Notes exceeds (ii) an amount equal to
Interest Expense, for such period, attributable to a portion of the
Revolving Loan (as defined in the Revolving Credit Agreement, as
amended from time to time) equal to the outstanding principal
amount of Notes outstanding during such period (or if no such
portion of the Revolving Loan (as defined in the Revolving Credit
Agreement, as amended from time to time) was outstanding during
such period, what Interest Expense, for such period, attributable
to such portion of the Revolving Loan (as defined in the Revolving
Credit Agreement, as amended from time to time) would have been,
assuming such portion of the Revolving Loan (as defined in the
Revolving Credit Agreement, as amended from time to time) had been
outstanding).
<PAGE>
AVAILABILITY:
The term "Availability" shall have the meaning given that term
in the Revolving Credit Agreement, as amended from time to time.
FISCAL PERIOD:
The term "Fiscal Period" shall mean any four or five week fiscal
period (as applicable) of the Company.
INTEREST COVERAGE RATIO:
The term "Interest Coverage Ratio" shall mean, for any
four-quarter period, the ratio of (i) EBITDA of the Company and its
subsidiaries for the four most recent consecutive fiscal quarters
ending on or prior to the date of determination, to (ii) Adjusted
Interest Expense for such four-quarter period.
TRIGGER DATE:
The term "Trigger Date" means the last day of any Fiscal
Period (i) for which the average amount (calculated on a daily
basis for each Business Day (as defined in the Revolving Credit
Agreement, as amended from time to time) in such Fiscal Period) of
Availability was less than $5,000,000 OR (ii) during which the
amount of Availability (calculated at the close of business of each
day during such Fiscal Period) was less than $3,500,000 at the end
of any Business Day; PROVIDED, that in the event that a default
occurs under Section 6.05(j)(ii) of the Revolving Credit Agreement
or if the Company fails to deliver to the Trustee a copy of the
certificate required to be delivered pursuant to Section
6.05(j)(ii) of the Revolving Credit Agreement at the times it is
required to be delivered pursuant to Section 6.05(j)(ii) of the
Revolving Credit Agreement, the Trigger Date shall for all purposes
of this Indenture be deemed to have occurred as of the last day of
the Fiscal Period immediately preceding the date such default
occurs."
4. AMENDMENT OF FINANCIAL COVENANTS. Effective as of the
Effective Date, Sections 6.12(c) and (d) of the Indenture are amended and
restated to read as follows:
"(c) EBITDA. From and after the Trigger Date, not permit
EBITDA of the Company and its subsidiaries at the end of each
fiscal quarter ending on or after the Trigger Date for the
four-quarter period then ending to be less than the respective
amounts set forth below for the periods indicated:
2
<PAGE>
FOUR FISCAL QUARTERS MINIMUM
ENDING ON OR ABOUT EBITDA
January 31, 1998 $7,000,000
April 30, 1998 $6,800,000
July 31, 1998 $6,200,000
October 31, 1998 $6,400,000
January 31, 1999 $7,600,000
April 30, 1999 $8,600,000
July 31, 1999 $8,700,000
October 31, 1999 and
the last day of each
fiscal quarter thereafter $8,600,000
(d) INTEREST COVERAGE RATIO. From and after the Trigger
Date, not permit or suffer the Interest Coverage Ratio of the
Company and its subsidiaries at the end of each fiscal quarter
ending on or after the Trigger Date for the four quarter period
then ending to be less than the respective amounts set forth below
for the periods indicated:
FOUR FISCAL QUARTERS MINIMUM
ENDING ON OR ABOUT RATIO
January 31, 1998 3.8:1
April 30, 1998 3.9:1
July 31, 1998 3.5:1
October 31, 1998 3.4:1
January 31, 1999 4.1:1
April 30, 1999 4.4:1
July 31, 1999 4.4:1
October 31, 1999 and
the last day of each
fiscal quarter thereafter 4.1:1"
5. ELECTION TO APPLY REVISIONS TO REVOLVING CREDIT AGREEMENT
COVENANTS. If the EBITDA or Interest Coverage Ratio covenants contained in
Sections 7.10 and 7.11 of the Revolving Credit Agreement (or any related
definitions) are revised after the date of this Agreement, the Holders of at
least a majority in principal amount of the Outstanding Notes may elect to
amend the corresponding financial covenants (and any related definitions)
contained in Sections 6.12(c) and (d) of the Indenture, by Act of such
Holders, effective when evidence of such Act shall have been delivered to the
Trustee and the Company. Any such election must apply to all or none of the
changes to Section 7.10 of the Revolving Credit Agreement (and any related
definitions), and it must apply to all or none of the changes to Section 7.11
of the Revolving Credit Agreement (and any related definitions). Any such
election must be made and received by the
3
<PAGE>
Trustee and the Company within 90 days after Holders of the Notes are sent a
copy of any such amendment to the Revolving Credit Agreement.
6. DELIVERY OF CERTIFICATES. Effective as of the Effective Date,
the following is added as a new Section 6.16 of the Indenture:
"SECTION 6.16. CERTIFICATES.
The Company covenants and agrees with the Trustee that, so
long as any Notes shall remain Outstanding, it will furnish to the
Trustee (i) no later than the Wednesday next following the end of
each week, a certificate substantially in the form of SCHEDULE
6.05(j) to the Revolving Credit Agreement (or in such other form as
is mutually agreed to by the Company and the Agent under the
Revolving Credit Agreement) executed by the chief financial officer
of the Company (or another duly authorized financial officer of the
Company) demonstrating compliance as at the close of business on
Saturday of the previous week with the Borrowing Base (as defined
in the Revolving Credit Agreement) and (ii) no later than the third
Business Day of each Fiscal Period, a certificate substantially in
the form of SCHEDULE 6.05(j)(ii) to the Revolving Credit Agreement
(or in such other form as is mutually agreed to by the Company and
the Agent under the Revolving Credit Agreement) executed by the
chief financial officer of the Company (or another duly authorized
financial officer of the Company) setting forth with respect to the
immediately preceding Fiscal Period (A) the average amount
(calculated on a daily basis for each Business Day in such prior
Fiscal Period) of Availability and (B) the actual amount of
Availability as of the close of business of each day during such
Fiscal Period. A copy of current SCHEDULES 6.05(j) AND 6.05(j)(ii)
to the Revolving Credit Agreement are attached, and the Company
will provide the Trustee with any other forms of such Schedules as
are mutually agreed to by the Company and the Agent under the
Revolving Credit Agreement. In addition, if the Trigger Date has
occurred, each of these certificates delivered thereafter shall
contain a statement to that effect. The Trustee is not required to
forward these certificates to the Holders of Outstanding Notes.
However, the Trustee will notify the Holders of the Outstanding
Notes (i) if it has not received either of these certificates when
due, and (ii) if the Trigger Date occurs."
7. AMENDMENT TO EBITDA EVENT OF DEFAULT. Effective as of the
Effective Date, Section 8.01(a)(iv) of the Indenture are amended and restated
to read as follows:
"(iv) default in the performance, or breach, of any covenant
or warranty of the Company in this Indenture (other than a covenant
or warranty, a default in the performance or breach of which is
elsewhere in this Section 8.01 specifically dealt with), and
continuance of such default or breach for a period of 30 calendar
days after there has been given, by registered or certified mail,
to the Company by the Trustee or to the Company and the Trustee by
the Holders of at least 25% in principal amount of the Outstanding
Notes a written notice specifying such default or breach and
requiring it to be remedied and stating
4
<PAGE>
that such notice is a "Notice of Default" hereunder;"
8. CONSIDERATION FOR EFFECTING AMENDMENT. Upon the Effective
Date, the Company shall pay to the Trustee for the benefit of the holders of
the Outstanding Notes, 4.5% of the principal amount of the Outstanding Notes
as of the date of this Supplemental Indenture as consideration for effecting
this Supplemental Indenture. The payment of such consideration shall not
change the amount of principal and interest due with respect to the
Outstanding Notes.
9. REPRESENTATIONS AND WARRANTIES. The Company hereby represents
and warrants as follows (which representations and warranties shall survive
the execution and delivery of this Supplemental Indenture) as of the date
hereof that:
a. All representations and warranties contained in the
Indenture are true and correct in all material respects as of the date of
this Supplemental Indenture with the same force and effect as if made on such
date (except to the extent that any such representation or warranty relates
expressly to an earlier date).
b. The Company has the corporate power and authority to
execute, deliver and carry out the terms and provisions of this Supplemental
Indenture and has taken all necessary corporate action to authorize the
execution, delivery and performance of this Supplemental Indenture.
c. This Supplemental Indenture has been duly executed and
delivered and constitutes the legal, valid and binding obligation of the
Company, and is enforceable in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, reorganization,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally and by general equity principles.
d. No registration or filing with, consent or approval of,
or other action by, any Federal, State or other governmental agency,
authority or regulatory body is or will be required on behalf of the Company
in connection with the execution, delivery, performance, validity or
enforcement of this Supplemental Indenture other than any such registration
or filing which has been made or any such consent, approval or other action
which has been obtained and remains in full force and effect and other than
the filing of a Form 10-Q or a Form 10-K with the Securities and Exchange
Commission.
e. The execution, delivery and performance of this
Supplemental Indenture by the Company will not violate any provision of the
certificate or articles of incorporation or bylaws of the Company or any of
its subsidiaries or any law, statute, rule or regulation, or any order or
decree of any court of governmental instrumentality applicable to the Company
or any of its subsidiaries, or, after the Effective Date, violate, result in
the breach of or constitute a default under any indenture, agreement or other
instrument to which the Company or any of its subsidiaries or any of their
respective properties or assets are or may be bound.
5
<PAGE>
f. After giving effect to this Supplemental Indenture after
the Effective Date, the Borrower is in compliance with all of the various
covenants and agreements applicable to it set forth in the Indenture.
g. After giving effect to this Supplemental Indenture after
the Effective Date, no event has occurred and is continuing which constitutes
or would constitute, with the giving of notice or the lapse of time or both,
an Event of Default under the Indenture.
h. The Company has no defense to or setoff, counterclaim or
claim against payment of the Notes or enforcement of the Indenture or the
Notes based upon a fact or circumstance existing or occurring on or prior to
the date of this Supplemental Indenture.
10. CONDITIONS PRECEDENT. Notwithstanding any term or provision
of this Supplemental Indenture to the contrary, no amendment set forth in
this Supplemental Indenture shall become effective until the Trustee shall
have determined that each of the following conditions precedent shall have
been satisfied:
a. The Company shall have delivered to the Trustee a copy of
the resolution of the Company, certified by the Secretary or an Assistant
Secretary of the Company to have been duly adopted by the Board of Directors
and to be in full force and effect on the date of such certification, that
this Supplemental Indenture has been authorized by the Company. The Company
shall have also delivered to the Trustee a certification of an officer of the
Company that all of the conditions precedent to the effectiveness of this
Indenture Supplement shall have been met as of the date of such certificate.
b. The Trustee shall have received an Opinion of Counsel
stating that the execution of this Supplemental Indenture is authorized or
permitted by the Indenture.
c. Counterparts of the separate Agreement, dated the date of
this Supplemental Indenture, between the Company and Elliott Associates, L.P.
("Elliott"), pursuant to which Elliott is consenting to the amendments
contained in this Supplemental Indenture, shall have been duly executed and
delivered on behalf of the Company and Elliott and such agreement shall be in
full force and effect.
d. Counterparts of this Supplemental Indenture shall have
been duly executed and delivered on behalf of the Company and the Trustee.
e. The consideration described in Section 8 shall have been
paid to the Trustee.
11. "EFFECTIVE DATE". The Effective Date shall be the later of
(i) the date the Company obtains the consent of Fleet Bank N.A. under the
Revolving Credit Agreement to this Supplemental Indenture, and (ii) the date
this Supplemental Indenture is executed and delivered by the parties to
6
<PAGE>
this Supplemental Indenture.
12. ADDITIONAL EVENT OF DEFAULT. It shall constitute an Event of
Default under the Indenture if any of the representations and warranties of
the Company under this Supplemental Indenture shall prove to have been
incorrect in any material respect when made.
13. NO OTHER CHANGE. Except as modified by this Supplemental
Indenture, the Indenture shall continue in full force according to its terms
and is hereby ratified.
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed, all as of the day and year first
above written.
GANTOS, INC.
By:
----------------------------------------
Its:
----------------------------------
Attest:
- -----------------------------
Name:
------------------------
Title:
-----------------------
STATE STREET BANK AND TRUST COMPANY
By:
----------------------------------------
Its:
----------------------------------
7
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
On this __ day of December, 1997, before me personally came
_______________, to me known, who, being by me duly sworn, did depose and say
that he/she is _______________ of GANTOS, INC., one of the entities described
in and which executed the above instrument; and that he/she signed his/her
name thereto by authority of the Board of Directors of said entity.
--------------------------------------
Notary Public
In Witness Whereof, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.
--------------------------------------
Notary Public
8
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
On this __ day of December, 1997, before me personally came
_______________, to me known, who, being by me duly sworn, did depose and say
that he/she is _______________ of STATE STREET BANK AND TRUST COMPANY, one of
the entities described in and which executed the above instrument; and that
he/she signed his/her name thereto by authority of the Board of Directors of
said entity.
--------------------------------------
Notary Public
In Witness Whereof, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.
--------------------------------------
Notary Public
9
<PAGE>
AGREEMENT
THIS AGREEMENT (the "Agreement") is made as of December 15, 1997
between Elliott Associates, L.P. ("Elliott") and Gantos, Inc. ("Gantos").
RECITALS
A. Gantos and State Street Bank and Trust (as successor to Fleet
Bank N.A., formerly known as Shawmut Bank Connecticut, National Association)
(the "Trustee") have entered into the Indenture, dated as of April 1, 1995
(the "Indenture").
B. Pursuant to the Indenture, Gantos issued six-year notes
bearing interest payable quarterly at 12.75% (the "Notes").
C. Elliott currently owns $5,022,271.58 in principal amount of
the Outstanding Notes.
D. Gantos has been in violation of one or more of the financial
covenants contained in the Indenture since November 1, 1997.
E. Gantos and the Trustee propose to enter into a Supplemental
Indenture, dated the same date as this Agreement, a copy of which is attached
to this Agreement (the "Supplemental Indenture"), to amend the financial
covenants contained in the Indenture.
F. In exchange for the consideration payable to the Trustee for
the benefit of the Holders of Outstanding Notes, Elliott is willing to waive
past violations under the Indenture and consent to the Indenture Supplement
on the terms and conditions set forth in this Agreement.
THEREFORE, the parties agree as follows:
1. CAPITALIZED TERMS. Capitalized terms used in this Agreement
and not defined in this Agreement have the meanings given them in the
Indenture.
2. WAIVER OF DEFAULTS. Elliott represents and warrants that it
is the Holder of $5,022,271.58 in principal amount of the Outstanding Notes.
Effective on the "Effective Date" (defined below), pursuant to Section
8.01(d) of the Indenture, on behalf of the Holders of all the Notes, Elliott
hereby waives any past default by the Company under Sections 6.12(c) or (d)
of the Indenture for the second and third fiscal quarters of fiscal 1997, and
any related notice defaults under other provisions of the Indenture for such
periods with respect to such defaults, including under Sections 6.07 and 8.08.
3. CONSENT AND ACT OF THE HOLDERS. Elliott acknowledges that
this Agreement embodies its consent to the provisions set forth in the
Supplemental Indenture as the Holder of a majority in principal amount of the
Outstanding Notes, and that it is executing and delivering this Agreement to
the Company and to the Trustee, and that its execution and delivery of this
Agreement to the Company and the Trustee constitutes its "Act" as defined in
Section 14.11 of the Indenture.
<PAGE>
4. PAYMENT OF LEGAL FEES. The Company will pay Elliott's
reasonable legal fees in connection with negotiation, execution and delivery
of this Agreement, including, without limitation, the negotiation of the
terms and provisions of the Supplemental Indenture, up to a maximum of
$50,000, based upon billing records to the nearest half hour, with a
description of the service provided.
5. ENTIRE AGREEMENT. This Agreement represents the entire
agreement of the parties to this Agreement with respect to the subject matter
of this Agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date set forth in the introductory paragraph of this
Agreement.
ELLIOTT ASSOCIATES, L.P.
By:
-----------------------------------
Its:
-----------------------------
GANTOS, INC.
By:
-----------------------------------
Its:
-----------------------------
<PAGE>
AMENDMENT NO. 4 TO CREDIT AGREEMENT
AMENDMENT NO. 4 TO CREDIT AGREEMENT, dated as of February 1, 1998
(this "AMENDMENT"), among GANTOS, INC., a Michigan corporation (the "BORROWER"),
the lenders named therein (each individually, a "LENDER" and collectively, the
"LENDERS"), and FLEET BANK, N.A. (formerly known as Natwest Bank N.A.) as agent
for the Lenders (in such capacity, the "AGENT").
WHEREAS, the Borrower, the Lenders, and the Agent are party to the
Revolving Credit Agreement, dated as of March 10, 1995 (as amended by amendment
no. 1, dated April 25, 1996, amendment no. 2, dated March 18, 1997 and amendment
no. 3, dated October 8, 1997 and as otherwise and/or further amended,
supplemented or modified from time to time in accordance with its terms, the
"CREDIT AGREEMENT"); and
WHEREAS, subject to the terms and conditions hereof, the parties
hereto desire to amend certain provisions of the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, and subject to the fulfillment of the conditions
set forth below, the parties hereto agree as follows:
1. DEFINED TERMS. Unless otherwise specifically defined herein, all
capitalized terms used herein shall have the respective meanings ascribed to
such terms in the Credit Agreement.
2. AMENDMENTS TO CREDIT AGREEMENT. Subject to the conditions as to
effectiveness set forth in Paragraph 4 of this Amendment, the Credit Agreement
is hereby amended effective as of February 1, 1998 as follows:
(a) The definition of "Borrowing Base" appearing in Article I of the
Credit Agreement is amended and restated in its entirety as
follows:
"BORROWING BASE" shall mean an amount equal to:
(a) ninety percent (90%) of the Net Amount of Eligible Receivables,
PLUS
(b) the excess of:
<PAGE>
(i) the lesser of (A) (1) at any time during the five month
period commencing on October 1, 1997 and ending on February 28,
1998, and each four month period occurring thereafter commencing
on October 1 and ending on January 31, fifty-five percent (55%)
of the Eligible Inventory valued at the lower of cost (on a FIFO
basis) and current market value and (2) at any time during the
seven month period commencing on March 1, 1998 and ending on
September 30, 1998, and each eight month period occurring
thereafter commencing on February 1 and ending on September 30,
forty-five percent (45%) of the Eligible Inventory valued at the
lower of cost (on a FIFO basis) and current market value and (B)
thirty-five percent (35%) of the Retail Value of Eligible
Inventory, OVER
(ii) the aggregate amount of all outstanding gift
certificates sold by the Borrower.
3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants as follows (which representations and warranties shall survive the
execution and delivery of this Amendment) as of the date hereof that:
(a) All representations and warranties contained in the Credit
Agreement and each of the other Loan Documents are true and correct in all
material respects as of the date hereof with the same force and effect as if
made on such date (except to the extent that any such representation or warranty
relates expressly to an earlier date).
(b) The Borrower has the corporate power and authority to execute,
deliver and carry out the terms and provisions of this Amendment and has taken
all necessary corporate action to authorize the execution, delivery and
performance of this Amendment.
(c) This Amendment has been duly executed and delivered and
constitutes the legal, valid and binding obligation of the Borrower, and is
enforceable in accordance with its terms, except as the enforceability thereof
may be limited by bankruptcy, reorganization, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally and by
general equity principles.
<PAGE>
(d) No registration or filing with, consent or approval of, or other
action by, any Federal, State or other governmental agency, authority or
regulatory body is or will be required on behalf of the Borrower in connection
with the execution, delivery, performance, validity or enforcement of this
Amendment other than any such registration or filing which has been made or any
such consent, approval or other action which has been obtained and remains in
full force and effect and other than the filing of a Form 10-Q or a Form 10-K
with the Securities and Exchange Commission.
(e) The execution, delivery and performance of this Amendment by the
Borrower will not violate any provision of the certificate or articles of
incorporation or bylaws of the Borrower or any of its subsidiaries or any law,
statute, rule or regulation, or any order or decree of any court or governmental
instrumentality applicable to the Borrower or any of its subsidiaries, or
violate, result in the breach of or constitute a default under any indenture,
agreement or other instrument to which the Borrower or any of its subsidiaries
or any of their respective properties or assets are or may be bound.
(f) After giving effect to this Amendment, the Borrower is in
compliance with all of the various covenants and agreements applicable to it set
forth in the Credit Agreement and each of the other Loan Documents.
(g) After giving effect to this Amendment, no event has occurred and
is continuing which constitutes or would constitute, with the giving of notice
or the lapse of time or both, an Event of Default under the Credit Agreement or
any of the other Loan Documents, or an Event of Default (as defined in the
Indenture) under the Indenture.
(h) The Borrower has no defense to or setoff, counterclaim or claim
against payment of the Obligations or enforcement of the Loan Documents based
upon a fact or circumstance existing or occurring on or prior to the date
hereof.
4. CONDITIONS PRECEDENT. Notwithstanding any term or provision of
this Amendment to the contrary, the amendments set forth in Paragraph 2 hereof
shall become effective as of February 1, 1998 if, and only if, the Agent shall
have determined that each of the following conditions precedent shall have been
satisfied, such determination to be conclusively evidenced by the Agent's
execution and delivery of this Amendment:
<PAGE>
(a) All required corporate actions in connection with the execution
and delivery of this Amendment shall have been taken, and each shall be
satisfactory in form and substance to the Agent, and the Agent shall have
received all information and copies of all documents, including, without
limitation, records of requisite corporate action that the Agent may reasonably
request, to be certified by the appropriate corporate person or government
authorities.
(b) All representations and warranties made by the Borrower contained
in Paragraph 3 hereof shall be true and correct with the same effect as though
such representations and warranties had been made on the date of effectiveness
of the amendments contained in this Amendment after giving effect to such
amendments (unless any such representation or warranty speaks expressly to an
earlier date).
(c) Counterparts of this Amendment shall have been duly executed and
delivered on behalf of the Borrower, the Lenders and the Agent.
5. CONTINUED EFFECTIVENESS. The term "Agreement", "hereof",
"herein" and similar terms as used in the Credit Agreement, and references in
the other Loan Documents to the Credit Agreement, shall mean and refer to, from
and after the effective date of the amendments contained herein as determined in
accordance with Paragraph 4 hereof, the Credit Agreement as amended by this
Amendment. Each of the parties hereto agrees that, as amended by this
Amendment, all of the covenants and agreements and other provisions contained in
the Credit Agreement and the other Loan Documents are hereby ratified and
confirmed in all respects and shall remain in full force and effect from and
after the date of this Amendment.
6. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be an original, and all of which, taken
together, shall constitute a single instrument. Delivery of an executed
counterpart of a signature page to this Amendment by telecopier shall be
effective as delivery of a manually executed counterpart of this Amendment.
7. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO
THE CONFLICTS OF LAWS PRINCIPLES THEREOF).
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective officers thereunto duly authorized as of
the day and year first above written.
<PAGE>
GANTOS, INC., as Borrower
By:________________________________
Name:
Title:
FLEET BANK, N.A. (formerly known as Natwest
Bank N.A.), as Agent and as a Lender
By:________________________________
Name:
Title:
<PAGE>
EXHIBIT 10.19
AMENDMENT NO. 5 TO CREDIT AGREEMENT
AMENDMENT NO. 5 TO CREDIT AGREEMENT, dated as of February 27, 1998
(this "AMENDMENT"), among GANTOS, INC., a Michigan corporation (the "BORROWER"),
the lenders named therein (each individually, a "LENDER" and collectively, the
"LENDERS"), and FLEET BANK, N.A. (formerly known as Natwest Bank N.A.) as agent
for the Lenders (in such capacity, the "AGENT").
WHEREAS, the Borrower, the Lenders, and the Agent are party to the
Revolving Credit Agreement, dated as of March 10, 1995 (as amended by amendment
no. 1, dated April 25, 1996, amendment no. 2, dated March 18, 1997, amendment
no. 3, dated October 8, 1997 and amendment no. 4, dated as of February 1, 1998
and as otherwise and/or further amended, supplemented or modified from time to
time in accordance with its terms, the "CREDIT AGREEMENT"); and
WHEREAS, subject to the terms and conditions hereof, the parties
hereto desire to amend certain provisions of the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, and subject to the fulfillment of the conditions
set forth below, the parties hereto agree as follows:
1. DEFINED TERMS. Unless otherwise specifically defined herein, all
capitalized terms used herein shall have the respective meanings ascribed to
such terms in the Credit Agreement.
2. AMENDMENTS TO CREDIT AGREEMENT. Subject to the conditions as to
effectiveness set forth in Paragraph 4 of this Amendment, the Credit Agreement
is hereby amended effective as of February 27, 1998 as follows:
(a) The definition of "Borrowing Base" appearing in Article I of the
Credit Agreement is amended and restated in its entirety as follows:
"BORROWING BASE" shall mean an amount equal to:
(a) ninety percent (90%) of the Net Amount of Eligible Receivables,
PLUS
(b) the excess of:
<PAGE>
(i) the lesser of (A) (1) at any time during the period
commencing on October 1, 1997 and ending on March 31, 1998, and
each four month period occurring thereafter commencing on
October 1 and ending on January 31, fifty-five percent (55%) of
the Eligible Inventory valued at the lower of cost (on a FIFO
basis) and current market value and (2) at any time during the
period commencing on April 1, 1998 and ending on September 30,
1998, and each eight month period occurring thereafter commencing
on February 1 and ending on September 30, forty-five percent
(45%) of the Eligible Inventory valued at the lower of cost (on a
FIFO basis) and current market value and (B) thirty-five percent
(35%) of the Retail Value of Eligible Inventory, OVER
(ii) the aggregate amount of all outstanding gift
certificates sold by the Borrower.
3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants as follows (which representations and warranties shall survive the
execution and delivery of this Amendment) as of the date hereof that:
(a) All representations and warranties contained in the Credit
Agreement and each of the other Loan Documents are true and correct in all
material respects as of the date hereof with the same force and effect as if
made on such date (except to the extent that any such representation or warranty
relates expressly to an earlier date).
(b) The Borrower has the corporate power and authority to execute,
deliver and carry out the terms and provisions of this Amendment and has taken
all necessary corporate action to authorize the execution, delivery and
performance of this Amendment.
(c) This Amendment has been duly executed and delivered and
constitutes the legal, valid and binding obligation of the Borrower, and is
enforceable in accordance with its terms, except as the enforceability thereof
may be limited by bankruptcy, reorganization, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally and by
general equity principles.
(d) No registration or filing with, consent or approval of, or other
action by, any Federal, State or other governmental agency, authority or
regulatory body is or will be required on behalf of the Borrower in connection
with the execution, delivery, performance, validity or enforcement of this
Amendment other than any such
2
<PAGE>
registration or filing which has been made or any such consent, approval or
other action which has been obtained and remains in full force and effect and
other than the filing of a Form 10-Q or a Form 10-K with the Securities and
Exchange Commission.
(e) The execution, delivery and performance of this Amendment by the
Borrower will not violate any provision of the certificate or articles of
incorporation or bylaws of the Borrower or any of its subsidiaries or any law,
statute, rule or regulation, or any order or decree of any court or governmental
instrumentality applicable to the Borrower or any of its subsidiaries, or
violate, result in the breach of or constitute a default under any indenture,
agreement or other instrument to which the Borrower or any of its subsidiaries
or any of their respective properties or assets are or may be bound.
(f) After giving effect to this Amendment, the Borrower is in
compliance with all of the various covenants and agreements applicable to it set
forth in the Credit Agreement and each of the other Loan Documents.
(g) After giving effect to this Amendment, no event has occurred and
is continuing which constitutes or would constitute, with the giving of notice
or the lapse of time or both, an Event of Default under the Credit Agreement or
any of the other Loan Documents, or an Event of Default (as defined in the
Indenture) under the Indenture.
(h) The Borrower has no defense to or setoff, counterclaim or claim
against payment of the Obligations or enforcement of the Loan Documents based
upon a fact or circumstance existing or occurring on or prior to the date
hereof.
4. CONDITIONS PRECEDENT. Notwithstanding any term or provision of
this Amendment to the contrary, the amendments set forth in Paragraph 2 hereof
shall become effective as of February 27, 1998 if, and only if, the Agent shall
have determined that each of the following conditions precedent shall have been
satisfied, such determination to be conclusively evidenced by the Agent's
execution and delivery of this Amendment:
(a) All required corporate actions in connection with the execution
and delivery of this Amendment shall have been taken, and each shall be
satisfactory in form and substance to the Agent, and the Agent shall have
received all information and copies of all documents, including, without
limitation, records of requisite corporate action that the Agent may reasonably
request, to be certified by the appropriate corporate person or government
authorities.
3
<PAGE>
(b) All representations and warranties made by the Borrower contained
in Paragraph 3 hereof shall be true and correct with the same effect as though
such representations and warranties had been made on the date of effectiveness
of the amendments contained in this Amendment after giving effect to such
amendments (unless any such representation or warranty speaks expressly to an
earlier date).
(c) Counterparts of this Amendment shall have been duly executed and
delivered on behalf of the Borrower, the Lenders and the Agent.
5. CONTINUED EFFECTIVENESS. The term "Agreement", "hereof",
"herein" and similar terms as used in the Credit Agreement, and references in
the other Loan Documents to the Credit Agreement, shall mean and refer to, from
and after the effective date of the amendments contained herein as determined in
accordance with Paragraph 4 hereof, the Credit Agreement as amended by this
Amendment. Each of the parties hereto agrees that, as amended by this
Amendment, all of the covenants and agreements and other provisions contained in
the Credit Agreement and the other Loan Documents are hereby ratified and
confirmed in all respects and shall remain in full force and effect from and
after the date of this Amendment.
6. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be an original, and all of which, taken
together, shall constitute a single instrument. Delivery of an executed
counterpart of a signature page to this Amendment by telecopier shall be
effective as delivery of a manually executed counterpart of this Amendment.
7. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO
THE CONFLICTS OF LAWS PRINCIPLES THEREOF).
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective officers thereunto duly authorized as of
the day and year first above written.
GANTOS, INC., as Borrower
By:________________________________
Name:
Title:
FLEET BANK, N.A. (formerly known as Natwest
Bank N.A.), as Agent and as a Lender
By:________________________________
Name:
Title:
5
<PAGE>
EXHIBIT 10.20
AMENDMENT NO. 6 TO CREDIT AGREEMENT
AMENDMENT NO. 6 TO CREDIT AGREEMENT, dated as of March 30, 1998 (this
"AMENDMENT"), among GANTOS, INC., a Michigan corporation (the "BORROWER"), the
lenders named therein (each individually, a "LENDER" and collectively, the
"LENDERS"), and FLEET BANK, N.A. (formerly known as Natwest Bank N.A.) as agent
for the Lenders (in such capacity, the "AGENT").
WHEREAS, the Borrower, the Lenders, and the Agent are party to the
Revolving Credit Agreement, dated as of March 10, 1995 (as amended by amendment
no. 1, dated April 25, 1996, amendment no. 2, dated March 18, 1997, amendment
no. 3, dated October 8, 1997, amendment no. 4, dated as of February 1, 1998 and
amendment no. 5, dated as of February 27, 1998 and as otherwise and/or further
amended, supplemented or modified from time to time in accordance with its
terms, the "CREDIT AGREEMENT"); and
WHEREAS, subject to the terms and conditions hereof, the parties
hereto desire to amend certain provisions of the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, and subject to the fulfillment of the conditions
set forth below, the parties hereto agree as follows:
1. DEFINED TERMS. Unless otherwise specifically defined herein, all
capitalized terms used herein shall have the respective meanings
ascribed to such terms in the Credit Agreement.
2. AMENDMENTS TO CREDIT AGREEMENT. Subject to the conditions as to
effectiveness set forth in Paragraph 4 of this Amendment, the
Credit Agreement is hereby amended effective as of March 30,
1998, as follows:
(a) The definition of "Borrowing Base" appearing in Article I of the
Credit Agreement is amended and restated in its entirety as follows:
"BORROWING BASE" shall mean an amount equal to:
(a) ninety percent (90%) of the Net Amount of Eligible Receivables,
PLUS
(b) the excess of:
<PAGE>
(i) the lesser of (A) (1) at any time during the period
commencing on October 1, 1997 and ending on May 2, 1998, and each
four month period occurring thereafter commencing on October 1
and ending on January 31, fifty-five percent (55%) of the
Eligible Inventory valued at the lower of cost (on a FIFO basis)
and current market value and (2) at any time during the period
commencing on May 3, 1998 and ending on September 30, 1998, and
each eight month period occurring thereafter commencing on
February 1 and ending on September 30, forty-five percent (45%)
of the Eligible Inventory valued at the lower of cost (on a FIFO
basis) and current market value and (B) thirty-five percent (35%)
of the Retail Value of Eligible Inventory, OVER
(ii) the aggregate amount of all outstanding gift
certificates sold by the Borrower.
3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants as follows (which representations and warranties
shall survive the execution and delivery of this Amendment) as of the date
hereof that:
a. All representations and warranties contained in the Credit
Agreement and each of the other Loan Documents are true and correct in all
material respects as of the date hereof with the same force and effect as if
made on such date (except to the extent that any such representation or
warranty relates expressly to an earlier date).
b. The Borrower has the corporate power and authority to execute,
deliver and carry out the terms and provisions of this Amendment and has
taken all necessary corporate action to authorize the execution, delivery and
performance of this Amendment.
c. This Amendment has been duly executed and delivered and
constitutes the legal, valid and binding obligation of the Borrower, and is
enforceable in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, reorganization, insolvency, moratorium
and other similar laws affecting the enforcement of creditors' rights
generally and by general equity principles.
d. No registration or filing with, consent or approval of, or
other action by, any Federal, State or other governmental agency, authority
or regulatory body is or will be required on behalf of the Borrower in
connection with the execution, delivery, performance, validity or enforcement
of this Amendment other than any such
2
<PAGE>
registration or filing which has been made or any such consent, approval or
other action which has been obtained and remains in full force and effect and
other than the filing of a Form 10-Q or a Form 10-K with the Securities and
Exchange Commission.
e. The execution, delivery and performance of this Amendment by
the Borrower will not violate any provision of the certificate or articles of
incorporation or bylaws of the Borrower or any of its subsidiaries or any
law, statute, rule or regulation, or any order or decree of any court or
governmental instrumentality applicable to the Borrower or any of its
subsidiaries, or violate, result in the breach of or constitute a default
under any indenture, agreement or other instrument to which the Borrower or
any of its subsidiaries or any of their respective properties or assets are
or may be bound.
f. After giving effect to this Amendment, the Borrower is in
compliance with all of the various covenants and agreements applicable to it
set forth in the Credit Agreement and each of the other Loan Documents.
g. After giving effect to this Amendment, no event has occurred
and is continuing which constitutes or would constitute, with the giving of
notice or the lapse of time or both, an Event of Default under the Credit
Agreement or any of the other Loan Documents, or an Event of Default (as
defined in the Indenture) under the Indenture.
h. The Borrower has no defense to or setoff, counterclaim or
claim against payment of the Obligations or enforcement of the Loan Documents
based upon a fact or circumstance existing or occurring on or prior to the
date hereof.
4. CONDITIONS PRECEDENT. Notwithstanding any term or provision
of this Amendment to the contrary, the amendments set forth in Paragraph 2
hereof shall become effective as of March 30, 1998 if, and only if, the Agent
shall have determined that each of the following conditions precedent shall
have been satisfied, such determination to be conclusively evidenced by the
Agent's execution and delivery of this Amendment:
a. All required corporate actions in connection with the
execution and delivery of this Amendment shall have been taken, and each
shall be satisfactory in form and substance to the Agent, and the Agent shall
have received all information and copies of all documents, including, without
limitation, records of requisite corporate action that the Agent may
reasonably request, to be certified by the appropriate corporate person or
government authorities.
3
<PAGE>
b. All representations and warranties made by the Borrower
contained in Paragraph 3 hereof shall be true and correct with the same
effect as though such representations and warranties had been made on the
date of effectiveness of the amendments contained in this Amendment after
giving effect to such amendments (unless any such representation or warranty
speaks expressly to an earlier date).
c. Counterparts of this Amendment shall have been duly executed and
delivered on behalf of the Borrower, the Lenders and the Agent.
5. CONTINUED EFFECTIVENESS. The term "Agreement", "hereof", "herein"
and similar terms as used in the Credit Agreement, and references in the
other Loan Documents to the Credit Agreement, shall mean and refer to, from
and after the effective date of the amendments contained herein as determined
in accordance with Paragraph 4 hereof, the Credit Agreement as amended by
this Amendment. Each of the parties hereto agrees that, as amended by this
Amendment, all of the covenants and agreements and other provisions contained
in the Credit Agreement and the other Loan Documents are hereby ratified and
confirmed in all respects and shall remain in full force and effect from and
after the date of this Amendment.
6. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be an original, and all of which, taken
together, shall constitute a single instrument. Delivery of an executed
counterpart of a signature page to this Amendment by telecopier shall be
effective as delivery of a manually executed counterpart of this Amendment.
7. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT
TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF).
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective officers thereunto duly authorized as of
the day and year first above written.
GANTOS, INC., as Borrower
By:________________________________
Name:
Title:
FLEET BANK, N.A. (formerly known as Natwest
Bank N.A.), as Agent and as a Lender
By:________________________________
Name:
Title:
5
<PAGE>
EXHIBIT 10.31
February 13, 1998
CONFIDENTIAL
Gantos, Inc.
1266 East Main Street, 5th Floor
Stamford, Connecticut 06902
Attention: Arlene H. Stern
Ladies and Gentlemen:
PaineWebber Incorporated ("PaineWebber") is pleased to act as exclusive
financial advisor to Gantos, Inc. (the "Company") and its affiliates in
connection with any proposed sale transaction involving the Company and another
party (other than any present holder of any Notes on the date hereof under the
Company's indenture, dated as of April 1, 1995) (the "Purchaser"). This
Agreement confirms the terms of our engagement.
As used in this Agreement, the term "sale transaction" means, whether effected
in one transaction or a series of transactions: (a) any merger, consolidation,
reorganization (other than a filing under chapter 11 of the Bankruptcy Code) or
other business combination pursuant to which the business of the Company is
combined with that of a Purchaser (regardless of the Percentage of the
Purchaser's capital stock received by the Company) or (b) the acquisition,
directly or indirectly, by a Purchaser of more than 50% of the capital stock or
assets of the Company by way of a negotiated purchase or otherwise.
On the terms and subject to the conditions of this Agreement, PaineWebber
will assist the Company in identifying Purchasers and in analyzing, structuring,
negotiating and effecting proposed sale transactions. In the event that the
Company requests that PaineWebber assist it in preparing a descriptive
memorandum (the "Memorandum"), the Company will pay PaineWebber a retention fee
of $50,000. If requested by the Company, PaineWebber will render an opinion (the
"Opinion") as to whether or not the consideration to be received in a proposed
sale transaction is fair, from a financial point of view, to the shareholders of
the Company. If an Opinion is requested, the Company will pay PaineWebber a fee
of $250,000, payable in cash upon the delivery of the Opinion, regardless of the
conclusion reached by PaineWebber in the Opinion.
PaineWebber will also testify concerning such Opinion at the Company's
request at any judicial or regulatory hearing, deposition or arbitration,
provided that the Company shall pay to PaineWebber (i) PaineWebber's customary
hourly fees for each hour that a PaineWebber employee shall be required to
testify (or be available on site to testify) and (ii) all of PaineWebber's
out-of-pocket expenses including fees, disbursements and other charges of legal
counsel, as and when incurred, in connection with such testimony, in each case,
irrespective of the content of such testimony.
<PAGE>
If, (a) during this engagement, the Company enters into a definitive agreement
with a Purchaser, which subsequently results in a sale transaction either during
the term of this engagement or within twenty-four months after the termination
of this engagement or (b) within twenty-four months after the termination of
this engagement, the Company enters into a definitive agreement and closes a
sale transaction with a Purchaser expressly identified in writing to the Company
by PaineWebber as a potential purchaser during the term of this engagement on a
list, which may be amended from time to time, acknowledged in writing by the
Company, which it may refuse to do in its sole discretion, (the "pre-approved
list"), the Company will pay PaineWebber a transaction fee in an amount based on
the purchase price and calculated pursuant to the attached Schedule I, payable
in cash upon the closing of such sale transaction, but in an amount not less
than, in any circumstance, $500,000. Any Opinion fee and any retention fee paid
to PaineWebber pursuant to the previous paragraphs will be deducted in whole
from any transaction fee to which PaineWebber is entitled. The Company reserves
the right to reject any potential Purchaser proposed by PaineWebber and the
terms, amounts and provisions of any proposed transaction in its sole discretion
and to fail or refuse to consummate any proposed sale transaction for any reason
or for no reason.
The Company shall have the sole and absolute discretion to engage or refuse to
engage in discussions with potential Purchasers, to accept or reject any
proposed sale transaction, or to consummate or refuse to consummate any sale
transaction.
PaineWebber will only present information to the proposed Purchasers and or
discuss proposed transactions with the proposed Purchasers contained on the
pre-approved list. PaineWebber will not engage in any publicity or make any
publicity release concerning this letter agreement, its engagement hereunder or
any proposed or consummated sale transaction without the Company's prior
consent.
The term "purchase price" means the sum of the aggregate fair market value
of any securities issued, and any cash consideration paid, to the Company or its
security holders in connection with a sale transaction, plus the amount of any
indebtedness of the Company (excluding accounts payable, accrued expenses and
deferred taxes) that is assumed, directly or indirectly, by the Purchaser. The
fair market value of any such securities will be the value determined by the
Company and PaineWebber upon the closing of the sale transaction.
In addition to any fees payable to PaineWebber, the Company will reimburse
PaineWebber, upon request made from time to time, for all of its out-of-pocket
expenses incurred in accordance with PaineWebber's travel and expense policy and
in connection with, and during the term of, this engagement, including the fees,
disbursements and other charges of its legal counsel; provided that
reimbursement for such fees, disbursements and other charges (not including
charges related to the preparation, word processing, duplication and
distribution of the memorandum) shall not exceed $25,000 without prior consent
of the Company. In addition, if the company, in its sole discretion, requests
that PaineWebber use its internal resources to prepare, word process, duplicate
and/or distribute the Memorandum, then the Company will reimburse PaineWebber,
upon request made from time to time, for all such expenses, which shall not
exceed $25,000 without prior consent of the Company.
It is further understood that the Opinion, if rendered, will be prepared solely
for the confidential use of the Board of Directors of the Company and, except as
set forth in the next succeeding sentence, will
2
<PAGE>
not be reproduced, summarized, described or referred to or given to any other
person or otherwise made public without PaineWebber's prior written consent.
If the Opinion is included in the proxy statement, or any other SEC filing,
which rules require the inclusion of such opinion, the Opinion will be
reproduced in full, and, any description of or reference to PaineWebber or
summary of the Opinion will be in a form acceptable to PaineWebber and its
counsel.
The Company will furnish PaineWebber (and will request that each
prospective Purchaser with which the Company enters into negotiations furnish
PaineWebber) with such information as PaineWebber believes appropriate to its
assignment (all such information so furnished being the "Information"). The
Company recognizes and confirms that PaineWebber (a) will use and rely primarily
on the Information and on information available from generally recognized public
sources in performing the services contemplated by this Agreement and in
rendering the Opinion without having independently verified the same, (b) does
not assume responsibility for the accuracy or completeness of the Information
and such other information and (c) will not make an appraisal of any assets of
the Company or any prospective Purchaser. To the best of the Company's
knowledge, the Information to be furnished by the Company, when delivered, will
be true and correct in all material respects and will not contain any material
misstatement of fact or omit to state any material fact necessary to make the
statements contained therein not misleading. The Company will promptly notify
PaineWebber if it learns of any material inaccuracy or misstatement in, or
material omission from, any Information theretofore delivered to PaineWebber.
All material non-public information which is given to PaineWebber during the
course of the performance of its services under this Agreement will be used
solely in the course of the performance of its services under this Agreement and
will be treated confidentially by PaineWebber to the extent allowed by law for a
period of two years from the date hereof. Except as otherwise required by law
or by applicable regulators, PaineWebber will not disclose such information to a
third party without the consent of the Company for a period of two years from
the date hereof. Upon written request of the Company, PaineWebber will return
all material non-public information relating to the Company which was provided
by the Company to PaineWebber.
It is understood that PaineWebber is being engaged hereunder solely to
provide the services described above to the Board of Directors of the Company,
and that PaineWebber is not acting as an agent or fiduciary of, and shall have
no duties or liability to, the equity holders of the Company or any other third
party in connection with its engagement hereunder, all of which are hereby
expressly waived.
The Company agrees to the indemnification and other agreements set forth in
the Indemnification Agreement attached hereto, the provisions of which are
incorporated herein by reference and shall survive the termination, expiration
or supersession of this Agreement.
PaineWebber's engagement hereunder may be terminated by either the Company
or PaineWebber at any time upon written notice to that effect to the other
party, it being understood that the provisions relating to the payment of fees
and expenses and indemnification and contribution will survive any such
termination.
3
<PAGE>
THIS AGREEMENT WILL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY IN SUCH STATE. EACH OF THE COMPANY AND PAINEWEBBER AGREE
THAT ANY ACTION OR PROCEEDING BASED HEREON, OR ARISING OUT OF PAINEWEBBER'S
ENGAGEMENT HEREUNDER, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE
COURTS OF THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK,
THE COURTS OF THE STATE OF CONNECTICUT LOCATED IN THE CITY OF STAMFORD, THE
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, OR IN THE
UNITED STATES DISTRICT COURT FOR CONNECTICUT. THE COMPANY AND PAINEWEBBER
EACH HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE
OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK, THE COURTS OF THE
STATE OF CONNECTICUT LOCATED IN THE CITY OF STAMFORD, THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND OF THE UNITED
STATES DISTRICT COURT FOR CONNECTICUT FOR THE PURPOSE OF ANY SUCH ACTION OR
PROCEEDING AS SET FORTH ABOVE AND IRREVOCABLY AGREE TO BE BOUND BY ANY
JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH ACTION OR PROCEEDING. EACH
OF THE COMPANY AND PAINEWEBBER HEREBY IRREVOCABLY WAIVE, TO THE FULLEST
EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY
HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH ACTION OR PROCEEDING
HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
The Company (for itself, anyone claiming through it or in its name, and
on behalf of its equity holders) and PaineWebber each hereby irrevocably
waive any right they may have to a trial by jury in respect of any claim
based upon or arising out of this Agreement or the transactions contemplated
hereby. This Agreement may not be assigned by either party without the prior
written consent of the other party.
This Agreement (including the attached Indemnification Agreement)
embodies the entire agreement and between the parties hereto and supersedes
all prior agreements and understandings relating to the subject matter
hereof. If any provision of this Agreement is determined to be invalid or
unenforceable in any respect, such determination will not affect such
provision in any other respect or any other provision of this Agreement,
which will remain in full force and effect. This Agreement may not be amended
or otherwise modified or waived except by an instrument in writing signed by
both PaineWebber and the Company.
4
<PAGE>
Please confirm that the foregoing correctly sets forth our agreement by signing
and returning to PaineWebber the enclosed duplicate copy of this Agreement.
Very truly yours,
PaineWebber Incorporated
By ___________________________
Elizabeth M. Eveillard
Managing Director
Accepted and Agreed to as of the date first written above:
Gantos, Inc.
By_____________________________________
Arlene H. Stem
President and Chief Executive Officer
5
<PAGE>
Schedule I
M&A Advisory Fees
<TABLE>
<CAPTION>
Purchase Price(1) Fee Percentage (2)
- ----------------- ------------------
<S> <C>
On the first $50 million 1.5000%
On any amount above $50 million up to $250 million .7500%
</TABLE>
(1) Purchase Price is defined as the aggregate fair market value of any
securities issued and/or any cash paid, plus the amount of any indebtedness
(excluding accounts payable, accrued expenses and deferred taxes) assumed,
directly or indirectly, in connection with a transaction.
(2) Fee percentages are incremental based on Purchase Price. For example, a
$200 million Purchase Price would call for a fee percentage of 0.9375%
calculated as follows: 1.50% for the first $50 million plus a fee of 0.75% for
the amount above $50 million.
6
<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 30, 1998, appearing on page F-2 of this Form 10-K.
PRICE WATERHOUSE LLP
Battle Creek, Michigan
April 30, 1998
48
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GANTOS, INC. AS OF, AND FOR THE FISCAL YEAR ENDED,
JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 1,295
<SECURITIES> 0
<RECEIVABLES> 19,198
<ALLOWANCES> (591)
<INVENTORY> 22,540
<CURRENT-ASSETS> 50,647
<PP&E> 62,662
<DEPRECIATION> (48,115)
<TOTAL-ASSETS> 65,194
<CURRENT-LIABILITIES> 16,116
<BONDS> 27,398
0
0
<COMMON> 76
<OTHER-SE> 21,604
<TOTAL-LIABILITY-AND-EQUITY> 65,194
<SALES> 161,966
<TOTAL-REVENUES> 161,966
<CGS> 137,237
<TOTAL-COSTS> 137,237
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,341
<INCOME-PRETAX> (10,409)
<INCOME-TAX> 615
<INCOME-CONTINUING> (9,794)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,794)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.30)
</TABLE>
