<PAGE>
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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 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 0-14577
------------------------
GANTOS, INC.
(Exact name of registrant as specified in its charter)
<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 and non-voting common equity held
by nonaffiliates of the registrant as of April 23, 1999 calculated by reference
to the closing sale price as reported by Nasdaq on such date, was approximately
$4,887,000.
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 23, 1999 was 7,819,526.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders
scheduled for June 22, 1999 are incorporated by referenced in Part III.
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<PAGE>
PART I
ITEM 1. BUSINESS
Gantos is a specialty retailer of a full range of quality, fashionable
women's apparel and accessories at moderate to upper moderate prices. As of
April 23, 1999, 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 1999. 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 1998, 1997 and 1996 refer to
the fiscal years ended January 30, 1999, January 31, 1998, and February 1, 1997,
respectively.
RECENT DEVELOPMENTS
NEW CREDIT AGREEMENT AND CHANGES TO INDENTURE
On November 18, 1998, the Company entered into a Loan and Security Agreement
with Foothill Capital Corporation and Paragon Capital LLC (the "Foothill/Paragon
Facility"), replacing its Revolving Credit Agreement with Fleet Bank N.A. The
Company amended the Foothill/Paragon Facility as of February 28, 1999. The
Foothill/Paragon Facility expires November 18, 2001, and it provides the Company
with revolving credit loans and letters of credit up to $40 million, subject to
a borrowing base formula and lender reserves (as defined in the agreement).
Undrawn and unreimbursed letters of credit under the facility may not exceed
$5,000,000 in face amount. Loans under the Foothill/Paragon Facility generally
bear interest at Norwest Bank Minnesota's base rate plus 1.5%, except for
special advances based on a higher inventory advance rate, which bear interest
at the base rate plus 4.0%. The interest is payable in arrears on the first day
of each month. As of April 23, 1999, the Norwest Bank Minnesota base rate was
7.75%.
The Foothill/Paragon Facility carries annual commitment fees, payable
monthly, of 0.5% of the difference between $40 million and the average amount
outstanding under the facility (including the face amount of letters of credit)
and 1.5% of the face amount of outstanding letters of credit. The Company also
paid a $400,000 origination fee to Foothill/Paragon and must pay annual fees of
$200,000 and $100,000 on November 18, 1999 and November 18, 2000, respectively.
The Company must also pay servicing fees of $4,000 a month, which increase to
$9,000 a month if the Company requests any special advances. The
Foothill/Paragon Facility also provides for a $1,200,000, $800,000 or $400,000
termination fee if the credit facility is terminated before November 18, 1999,
November 18, 2000 or November 18, 2001, respectively.
The Foothill/Paragon Facility is secured by substantially all of the
Company's assets. The Foothill/ Paragon Facility contains, among other things,
financial covenants with respect to (i) additional indebtedness, (ii)
prohibitions on making distributions (including dividends), (iii) investments,
(iv) minimum net worth, and (v) minimum earnings before interest, taxes,
depreciation and amortization; and retail performance covenants with respect to
(i) maximum capital expenditures, (ii) minimum and maximum inventory levels,
(iii) minimum purchases, and (iv) minimum sales.
As of January 30, 1999, the Company had $31.8 million in borrowings and $1.4
million in letters of credit outstanding under the Foothill/Paragon Facility,
and approximately $1.4 million was available for borrowing under the
Foothill/Paragon Facility.
2
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The Company's Indenture, under which the Company's 12.75% Notes were issued,
also contains certain financial covenants. As of April 23, 1999, $4.7 million in
principal amount of Notes were outstanding. The Indenture was amended effective
as of June 30, 1998 to cure potential defaults under the Indenture. Previous
covenants concerning capital expenditures, earnings before interest, taxes,
depreciation and amortization, and interest coverage ratios were deleted from
the Indenture. The remaining net worth covenant requires the Company to maintain
a minimum net worth of $4.5 million at the end of each quarter through the third
quarter of fiscal 2000 and $6.0 million at the end of each subsequent quarter.
As of January 30, 1999, the Company's net worth was approximately $9.3 million.
Holders of approximately 96% of the notes underlying the Indenture agreed to
defer payment of their regularly scheduled July 1, 1998 payment of principal,
totaling approximately $745,000, until May 1, 1999 and 50% of their regularly
scheduled January 1, 1999 payment of principal, totaling approximately $372,500,
until February 15, 1999. In exchange for such deferral, the Company issued such
holders five-year warrants to purchase 150,000 of the Company's Common Shares at
an exercise price of $0.75 per share (originally issued at $1.675 per share and
repriced at $0.75 per share) and 225,000 of the Company's Common Shares at an
exercise price of $0.01 per share. In addition, the Company has filed a
registration statement on Form S-3 to register the resale of the Common Shares
issuable upon exercise of those warrants.
If the Company's availability under the Foothill/Paragon Facility trade
credit or sales are lower than expected, or if the Company's borrowing
requirements or liquidity needs are higher than expected, the Company could have
insufficient liquidity to continue its current operations, its business,
operations, liquidity, financial condition and results of operations could be
materially adversely affected, and the Company could be required to
substantially reduce or discontinue its operations. In addition, there can be no
assurance that the Company will be able to meet the financial covenants under
its borrowing arrangements for the next 12 months unless sales and trade credit
substantially improve.
MANAGEMENT CHANGES
In April 1998, Kenneth Green resigned as Vice President, General Counsel,
and Secretary. In May 1998, L. Douglas Gantos became a consultant to the
Company, rather than its Chairman of the Board. In June 1998, David C. Nelson
resigned as Senior Vice President, Chief Financial Officer and Treasurer. In
September 1998, Hope Grey resigned as Vice President, Technical Product
Management and Joseph Giudice resigned as Senior Vice President, Merchandise
Planning and Operations. In March 1999, Thomas J. Villano became the Company's
Senior Vice President, Chief Financial Officer and Secretary, Diane Abbate-Fox
became the Company's Vice President, General Merchandise Manager and Joseph Kuhn
became the Company's Vice President, Distribution, Real Estate and Construction.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company has a single operating segment; women's retail clothing stores.
The Company has no organizational structure dictated by product lines, geography
or customer type. Profitability is evaluated at the store level. Retail sales
are derived from one product line, women's clothing, and are to retail customers
in the United States. Long-lived assets are located exclusively in the United
States.
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.
3
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Management's research indicates that the typical Gantos customer is a career
woman, residing in a two-income, upper-middle to higher income household, who
has attended college, has sophisticated fashion taste and has high expectations
regarding quality, value, and service.
MERCHANDISE
The Company's stores offer a full range of current, quality, fashionable
merchandise at moderate to upper moderate prices. Each store carries an edited
selection of both private label and name brand sportswear (both coordinated
groupings and separate tops and bottoms), career dresses and suits, social
occasion dresses, accessories, outerwear, swimwear and, in selected stores,
shoes. The Company attempts to stock all stores with the same basic merchandise
content; however, certain merchandise is varied among stores depending on
individual store or customer attributes.
During the last quarter of 1996, the Company began the process of
redirecting merchandising and marketing strategies to enhance the position of
Gantos as a fashion brand. The Company plans to achieve this through:
- Emphasis on product design and development to reinforce Gantos as a
fashion brand by offering more private label product.
- Focus on consistent quality and fit through the addition of a technical
product management team.
- Development of direct sourcing capabilities to reduce costs and improve
quality.
- Improved quality and increased frequency of communications with the
customer through both charge statement inserts and direct mail catalogs.
Each of the Company's stores is designed to be a well-organized and complete
shopping source for its target customers, providing merchandise to outfit them
in casual, work and evening wear, including accessories. The following table
shows the approximate percentage of net sales for major merchandise
classifications (other than shoes) for the past three years:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------
PRODUCT CLASS 1998 1997 1996
- ------------------------------------------------------------------- ----- ----- -----
<S> <C> <C> <C>
Sportswear......................................................... 42% 38% 39%
Dresses............................................................ 37 40 37
Accessories........................................................ 15 13 15
Outerwear.......................................................... 3 4 5
Swimwear........................................................... 3 5 4
--- --- ---
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.
4
<PAGE>
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 1998, approximately 35.9% of the Company's sales were
made for cash, 34.2% by third party credit cards and 29.9% by the Gantos credit
card. During 1998, 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 3.3% of customer receivables
at 1998 year-end compared with 3.2% at 1997 year-end and 2.9% at 1996 year-end.
The Company's credit card program may be affected by changes in federal and
state consumer credit laws.
Gantos has a liberal return policy, offering merchandise exchanges or
refunds for cash or credit on returned merchandise at its stores within 90 days
from purchase.
ADVERTISING AND PROMOTION
Gantos relies largely on mall traffic to generate customer traffic. In
addition, the Company utilizes direct mail advertising. Advertising, primarily
by direct mail, informs customers about fashion trends and emphasizes Gantos'
fashion image. Direct mail advertising varies in size and format, from postcards
and catalogs to inserts and coupons mailed to Gantos credit card customers with
their monthly statements.
Gross advertising expenditures in 1998 and 1997 approximated 1.1% and 1.2%
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 1998 compared to 1997.
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
5
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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
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Average sales per store (in thousands):
All stores (1)................................................. $ 1,340 $ 1,456 $ 1,672
Stores open at least two years at end of year (2).............. $ 1,348 $ 1,462 $ 1,676
Average sales per square foot of selling space:
All stores (1)................................................. $ 191 $ 207 $ 237
Stores open at least two years at end of year (2).............. $ 191 $ 207 $ 237
</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 1998. In January 1998, the shoe department
closed in 6 stores. Sales for these 6 stores were restated to exclude shoe
sales for the previous 2 years.
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 1998, a portion of the selling space in 23 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 $737,000 in 1998, $889,000 in 1997, and $874,000 in
1996.
6
<PAGE>
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 OPENED CLOSED
BEGINNING DURING DURING OPEN AT
YEAR ENDED OF YEAR YEAR YEAR END 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
January 30, 1999....................................................... 115 0 0 115
</TABLE>
The Company did not open or close any stores in 1998. However, one store in
an Illinois mall was relocated to another location within the mall with smaller
square footage. The Company does not plan to open any new stores in 1999.
The following table shows the geographic distribution of the Company's
stores by state for the 115 stores open as of April 23, 1999.
<TABLE>
<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 1998 were incurred primarily for the remodeling of
one store. The Company expects that approximately $1.0 million will be required
for capital expenditures in 1999, principally for information system upgrades
and the remodeling and refixturing of approximately 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
7
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receives for shipment and arranges for delivery to the Company's distribution
center in Grand Rapids, Michigan. Merchandise not shipped through a consolidator
is delivered directly to the distribution center.
Merchandise is then inspected, allocated and shipped to the Company's
various stores. The Company generally does not warehouse merchandise, but
distributes it promptly to stores. The Company does warehouse damaged items
awaiting return to vendors and a portion of selected merchandise for later
allocation to stores in which such items are selling more rapidly than in other
stores. Shipments are made to the stores via package delivery service.
All of the products sold by Gantos are purchased directly from
manufacturers. The Company's purchasing strategy is to buy, where possible,
substantial quantities of quality merchandise from selected manufacturers to
whom the Company is an important customer. All purchasing decisions are made
centrally based on detailed merchandising plans. No manufacturer accounted for
more than 10% of the Company's purchases during any of the last three fiscal
years. The Company does not maintain any long-term or exclusive commitments or
arrangements to purchase from any manufacturer. The Company supplements some of
its merchandise lines with private label merchandise.
Management believes that the Company is one of the larger customers (based
on purchase volume) of a number of its suppliers. Gantos works closely with its
suppliers, keeping them informed of selling trends and helping them develop
merchandise lines and production schedules. The Company will continue to require
close working relationships with suppliers to obtain adequate supplies of
quality merchandise on favorable terms. To diminish the risk of not obtaining
satisfactory additional supplies of merchandise, the Company is continually
exploring possible additional resources for merchandise supply, including other
recognized domestic labels, private label merchandise (manufactured domestically
and overseas) and foreign manufacturers. There is no assurance that the Company
will be able to continue to purchase merchandise from preferred vendors in the
quantities and on the terms it 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. Planner 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 1,105,000 customer charge accounts (approximately
230,000 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 2.3%, 2.0% and 1.5% in 1998, 1997 and 1996,
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 30, 1999, the Company had 1,974 employees. This total consists
of 682 full-time employees and 1,292 part-time employees. The full-time
employees consist of 405 salaried employees and 277 hourly employees. Of the
full-time, hourly employees, 155 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 1998 and 1997, 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 30, 1999...................................................... $ 39,063 $ 31,758 $ 35,446 $ 43,358
January 31, 1998...................................................... $ 45,564 $ 35,816 $ 35,478 $ 45,108
<CAPTION>
NET INCOME (LOSS)
------------------------------------------
FIRST SECOND THIRD FOURTH
YEARS ENDED QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
January 30, 1999...................................................... $ (745) $ (4,952) $ (4,017) $ (3,103)
January 31, 1998...................................................... $ 1,455 $ (4,714) $ (3,388) $ (4,314)
</TABLE>
Because of the importance of the Christmas season, sales and operating
results for any quarter are not necessarily indicative of results for the year.
The Company's working capital and cash demands are seasonal, increasing in the
fall when inventories are being increased for the Thanksgiving/Christmas
seasons.
9
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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 1998, total
store rent under these leases was approximately $15.0 million, of which $15,000
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 23, 1999 expire:
<TABLE>
<CAPTION>
NUMBER OF LEASES
FISCAL YEARS EXPIRING
- ---------------------------------------------------------------------------- ---------------------
<S> <C>
1999-2000................................................................... 46(1)(2)
2001-2002................................................................... 53(1)
2003-2004................................................................... 4
2005-2006................................................................... 5
2007-2008................................................................... 4
2009........................................................................ 3
---
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.
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.
In 1997, 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
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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 it is not in compliance with the $1.00 minimum bid price
and $5,000,000 market value of public float requirements for continued listing
of The Nasdaq National Market. In addition, the Company did not hold an annual
meeting of shareholders in 1998, which violated another continued listing
requirement. At a hearing on April 22, 1999, the Company requested an exception
from these requirements until shortly after it holds its 1999 Annual Meeting of
Shareholders, if shareholders approve a proposed one-for-three reverse stock
split. The Nasdaq Stock Market might not grant the Company's request for an
exception and continued listing on The Nasdaq National Market. The Nasdaq Stock
Market could move the Company's listing to The Nasdaq SmallCap Market or it
could delist the Company's Common Shares from the Nasdaq Stock Market without
further notice to the Company. If the Company's Common Shares are delisted from
The Nasdaq Stock Market, they would likely be quoted on the OTC Bulletin Board.
Any delisting could cause the market price of the Common Shares to decline and
could make it much more difficult to buy or sell Common Shares on the open
market.
The table below sets forth the high and low closing sale prices for the
Company's common shares as reported by Nasdaq for 1998 and 1997.
<TABLE>
<CAPTION>
CLOSING SALE PRICE
--------------------
PERIOD HIGH LOW
- ------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
1998
1st Quarter............................................................. 1 1/4 1/4
2nd Quarter............................................................. 2 1/2
3rd Quarter............................................................. 1 1/2 7/16
4th Quarter............................................................. 1 1/4 7/16
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
</TABLE>
The number of shareholders of record of the Company's common shares as of
April 23, 1999 was 663.
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 5 of "Notes to Financial Statements".
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
5-YEAR SUMMARY AND SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995* 1994**
---------- ---------- ---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net Sales............................................ $ 149,625 $ 161,966 $ 184,366 $ 192,790 $ 197,288
Cost of sales........................................ (124,833) (137,237) (147,022) (151,912) (160,434)
Selling, general and administrative expense.......... (36,337) (38,807) (37,407) (40,018) (40,114)
Finance charge and other revenue..................... 4,562 4,843 4,732 4,472 5,020
Merger termination expense........................... (823)
Relocation severance provision....................... (400) 944 2,652
Operating income (loss).............................. (7,806) (9,235) 4,269 6,276 4,412
Interest expense..................................... (4,791) (2,341) (2,332) (2,278) (122)
Reorganization items................................. (279) (1,764)
Income (loss) before income taxes and extraordinary
items.............................................. (12,597) (11,576) 1,937 3,719 2,526
Income tax benefit................................... 615
Net income (loss) before extraordinary items......... (12,597) (10,961) 1,937 3,719 2,526
Extraordinary items.................................. (220) 1,628
Net income (loss).................................... $ (12,817) $ (10,961) $ 1,937 $ 3,719 $ 4,154
---------- ---------- ---------- ---------- ----------
PER SHARE DATA***
Net income (loss) per share (basic and diluted)
before extraordinary items......................... $ (1.65) $ (1.45) $ 0.26 $ 0.55 $ 0.95
Extraordinary items.................................. (.03) 0.61
Net income (loss) per share (basic and diluted)...... $ (1.68) $ (1.45) $ 0.26 $ 0.55 $ 1.56
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA
Total assets......................................... $ 66,653 $ 65,194 $ 65,858 $ 68,410 $ 95,983
Working capital...................................... $ 35,089 $ 34,531 $ 30,407 $ 25,193 $ 55,347
Long-term obligations................................ $ 37,651 $ 27,398 $ 11,940 $ 12,395 $ 66,981
Shareholders' equity................................. $ 9,321 $ 21,680 $ 32,462 $ 30,330 $ 6,748
---------- ---------- ---------- ---------- ----------
FINANCIAL RATIOS AND OTHER DATA
Current ratio........................................ 2.8 3.1 2.4 2.0 3.5
Return (loss) on average assets...................... (19.4)% (16.7)% 2.9% 4.5% 3.7%
Return (loss) on average shareholders' equity........ (82.7)% (40.5)% 6.2% 20.1% 88.9%
Book value per share at year end..................... $ 1.22 $ 2.87 $ 4.29 $ 4.49 $ 2.53
Number of stores at year end......................... 115 115 114 113 114
Weighted shares outstanding***....................... 7,651 7,550 7,574 6,759 2,665
</TABLE>
- --------------------------
* Data for 1995 include the results of operations for 53 weeks.
** The Company closed 46 stores between the fourth quarter of 1993 and the
second quarter of 1994, and emerged from its chapter 11 bankruptcy
proceedings (filed 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 (Loss) for 1998, 1997 and
1996 (fiscal years ended January 30, 1999, January 31, 1998, and February 1,
1997, 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
------------------------------- ------------------------
1998 1997 1996 1997-1998 1996-1997
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales.................................................... 100.0% 100.0% 100.0% (8)% (12)%
Cost of sales (including buying, distribution and occupancy
costs)..................................................... (83.4) (84.7) (79.7) (9) (7)
--------- --------- ---------
Gross income................................................. 16.6 15.3 20.3 (34)
Selling, general and administrative expense.................. (24.3) (24.0) (20.3) (6) 4
Finance charge and other revenue............................. 3.1 3.0 2.6 (6) 2
Merger termination expense................................... (0.6) 100
Relocation severance provision............................... (0.2) (100)
--------- --------- ---------
Operating income (loss)...................................... (5.2) (5.7) 2.4 15 (316)
Interest expense............................................. (3.2) (1.4) (1.3) 105 0
--------- --------- ---------
Income (loss) before income tax and extraordinary item....... (8.4) (7.1) 1.1 (9) (698)
Income tax benefit........................................... 0.4 (100) 100
--------- --------- ---------
Net income (loss) before extraordinary item.................. (8.4) (6.7) 1.1 (15) (698)
Extraordinary item (a)....................................... (0.2) 100
--------- --------- ---------
Net income (loss)............................................ (8.6)% (6.7)% 1.1% (17) (666)
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(a) In November 1998, the Company terminated its Revolving Credit Agreement with
Fleet Bank N.A. Payment of $220,000 ($.03 per share) in termination and
other fees resulted in an extraordinary loss during the year ended January
30, 1999.
1998 COMPARED TO 1997
Net sales decreased approximately 8%, or approximately $12.3 million, from
1997 to 1998. Net sales for stores in operation throughout both periods
decreased 8.2%. The 8.2% decrease in comparable store sales is comprised of a
7.8% decrease in unit sales and a .4% decrease in average sales dollars per
unit. Of the $12.3 million decrease, $11.2 million was attributable to a
decrease in dress sales, partially due to difficulties in obtaining merchandise
from vendors resulting from the Company's current financial condition and the
related tightening of trade credit.
Cost of sales decreased approximately $12.4 million from 1997 to 1998. The
decrease is due primarily to reduced sales volume. As a percent of net sales,
cost of sales decreased to 83.4% in 1998 from 84.7% in 1997. The decrease in
cost of sales, as a percent of net sales, is primarily the result of lower net
markdowns, partially offset by lower vendor allowances for the period compared
to a year ago and decreased sales volume with consistent buying, distribution
and occupancy costs.
13
<PAGE>
Selling, general and administrative (SG&A) expense decreased approximately
$2.5 million from 1997 to 1998. The decrease in SG&A is partly due to prior
period one-time moving costs associated with the relocation of the Company's
merchandising operations to Stamford, Connecticut. The decrease in SG&A is also
due to lower payroll and the related taxes primarily at the store locations due
to the decreased sales volume, and a decrease in depreciation due to the age of
the assets. These decreases were partially offset by increases in property and
real estate taxes, rent and maintenance and dues as a result of increases passed
on from the landlords and an increase in net advertising expense due to
increased private label merchandise and decreased vendor participation. As a
percent of net sales, SG&A expense increased from 24.0% to 24.3% primarily as a
result of lower sales, partially offset by the reductions described above.
Finance charge and other revenue decreased $281,000 to 3.1% of net sales
compared to 3.0% of net sales in the prior year. The decrease was partially due
to new legal limits on late fees and a decrease in finance charge income during
1998 due to a lower average outstanding balance of Gantos credit card
receivables compared to 1997. The decrease in the receivable balances is
primarily the result of lower sales for 1998. Finance charge income is expected
to remain lower than last year due to sales volume.
On May 12, 1998, the Company announced it had entered into a definitive
Agreement and Plan of merger (the "Merger Agreement") with Hit or Miss, Inc. and
HOM Holding, Inc., the sole stockholder of Hit or Miss. During the third
quarter, the Board of Directors authorized the Company to terminate the
Agreement. As a result of the termination, the Company recorded as expense the
costs of the proposed merger, including financial advisor and professional fees.
This expense of approximately $823,000 was recorded as merger termination
expense.
Interest expense increased approximately $2.5 million from 1997 to 1998. The
increase is due to higher debt levels under the Fleet and Foothill/Paragon
Facility and fees associated with the extension of the credit agreement required
during the negotiations of the proposed HOM Holding and its replacement with the
Foothill/Paragon Facility, partially offset by reduced interest expense on the
Indenture Notes as a result of scheduled principal payments. The increase in
amounts outstanding under the Foothill/Paragon Facility is due to operating
losses and continued difficulties with trade credit.
In November 1998, the Company terminated its Revolving Credit Agreement with
Fleet Bank N.A. Payment of $220,000 ($.03 per share) in termination and other
fees resulted in an extraordinary loss during the year ended January 30, 1999.
The effective tax rate for the year ended January 30, 1999 was 0% 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. The Company continues to recognize valuation allowances
for its net operating loss carry forward.
These factors resulted in a net loss before extraordinary items of $12.6
million, or $1.65 per share, in 1998 compared to net loss of $11.0 million, or
$1.45 per share, in 1997.
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.
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
14
<PAGE>
volume with consistent buying, distribution and occupancy costs, and lower
vendor allowances, partially offset by lower net markdowns and higher markups
for the period compared to a year ago.
Selling, general and administrative (SG&A) expense increased approximately
$1.4 million from 1996 to 1997. The increase was primarily due to the moving
costs associated with the relocation of the Company's merchandising operations
to Stamford, Connecticut, an increase in maintenance and dues expense as a
result of a rent settlement made to one of the Company's store landlords, an
increase in net advertising expense due to a decrease in vendor participation in
advertising co-op programs and an increase in corporate salaries as a result of
officers hired in 1996 and 1997. These increases were partially offset by
savings from cost control measures of approximately $810,000 at the store and
corporate levels during 1997 compared to 1996. As a percent of net sales, SG&A
expense increased from 20.3% to 24.0% primarily as a result of the lower sales
coupled with the expense increases described above partially offset by the cost
control measures.
Finance charge and other revenue increased $111,000 to 3.0% of net sales
compared to 2.6% of net sales in the prior year. The increase was primarily due
to an increased late fee policy implemented on the Gantos charge card in 1997,
partially offset by a decrease in finance charge income due to a lower average
outstanding balance of Gantos credit card receivables compared to 1996. The
decrease in the receivable balances is primarily due to lower sales and a lower
percentage of total sales on the Gantos charge card from 30.7% in 1996 to 28.3%
in 1997.
During 1996, the Company recorded a provision of $0.4 million for
anticipated severance costs related to the relocation of the corporate offices
to Stamford, Connecticut
Interest expense remained flat in 1997 compared to 1996. Decreases in
interest expense due to the completion of loan fee amortization in March 1997
and to payments made on long-term debt in 1996 and 1997 were offset by higher
average revolving credit facility borrowings outstanding during 1997 and higher
interest rates. Revolving credit interest rates are expected to increase in 1998
as a result of recent amendments to the facility and the average amounts
outstanding under the revolving credit facility are expected to be higher in
1998.
The effective tax rate for the year ended January 31, 1998 was 5.3% which is
less than the statutory rate of 35% due to the establishment of valuation
allowances against tax assets related to net operating loss carryforwards due to
the Company's inability to determine that it is more likely than not that these
assets will be realized, partially offset by the reversal of previously recorded
valuation allowances during the year for other deferred tax items.
These factors resulted in a net loss of $11.0 million, or $1.45 per share,
in 1997 compared to net income of $1.9 million, or $0.26 per share, in 1996.
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 1998, 1997, and 1996 were $1.1, $4.9, and
$2.7 million, respectively. Capital expenditures for 1998 were incurred
primarily for remodeling one store. Capital expenditures for 1999 are estimated
to be $1.0 million. These amounts are expected to be used primarily for
information system upgrades and 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 1999 are expected to be financed primarily
from funds generated from operations and from borrowings under the
Foothill/Paragon Facility.
15
<PAGE>
Net cash used by operating activities totaled $8.7 million in 1998 compared
to $13.2 million in 1997. The decrease was primarily due to an increase in
accounts payable this year (compared to a decrease last year) due to improved
trade credit, a decrease in prepaid expenses this year compared to a substantial
increase last year due to partial prepayments required last year for merchandise
before it was received and approximately $2.0 million of cash deposited with
some factors last year securing accounts payable a smaller decrease in accrued
expenses and other this year due to the timing of payments and the effects of
lower sales volumes, and cash used last year for facilities closings. These
amounts were partially offset by the larger increase in merchandise inventory,
the smaller decrease in receivables and the greater net loss this year (net of
non-cash items). The Company expects the accounts receivable balance to remain
lower than last year levels for 1999 and trade credit to remain tight through at
least May 1999.
Net cash provided by financing activities in 1998 was approximately $9.8
million, compared to $15.1 million in 1997. The decrease in cash provided is the
result of decreased borrowings under the Fleet and Foothill/Paragon facilities,
partially offset by the reduced payments on the outstanding Notes (approximately
one payment due July 1, 1998 was deferred to May 1, 1999 and approximately half
of one payment due January 1, 1999 was deferred to February 15, 1999). Cash
provided in 1998 represents net borrowings of $12.2 million ($167.8 million in
total borrowings, $155.6 million in total payments) under the Fleet and
Foothill/Paragon facilities, partially offset by approximately $2.0 million in
payments made on the long-term notes. In 1997, the Company borrowed $19.6
million ($204.6 million in total borrowings, $185.0 in total payments) under the
Fleet Facility, partially offset by $4.1 million in payments on the long-term
notes (including a $1.8 million "alternative cash flow payment"). The Company
expects to make payments on the Notes of approximately $4.2 million in 1999.
The Company had a revolving credit agreement (the "Fleet Facility") with
Fleet Bank N.A. (formerly NatWest Bank N.A.), which was replaced effective
November 18, 1998 with a Loan and Security Agreement with Foothill Capital
Corporation and Paragon Capital LLC (the "Foothill/Paragon Facility"). The
Foothill/Paragon Facility expires November 18, 2001, and it provides the Company
with revolving credit loans and letters of credit up to $40 million, subject to
a borrowing base formula and lender reserves (as defined in the agreement).
Undrawn and unreimbursed letters of credit under the facility may not exceed
$5,000,000 in face amount. See Note 5 to the Financial Statements in this Report
for a description of the Foothill/Paragon Facility, which is incorporated in the
Item 7 by reference. As of April 23, 1999, the Company had $32.2 million in
borrowings and $2 million in letters of credit outstanding under the Foothill/
Paragon Facility, and approximately $1.4 million was available for borrowing
under the Foothill/Paragon Facility. During 1998, the weighted average interest
rate under the Fleet Facility and the Foothill/Paragon Facility was 9.07%. As of
April 23, 1999, the weighted average interest rate under the Foothill/Paragon
Facility was 9.05%.
The Company's Indenture, under which the 12.75% notes were issued, was
amended as of June 30, 1998 to cure potential defaults under the Indenture. See
Note 5 of the Notes to Financial Statements, which is incorporated in this Item
7 by reference, for a description of the terms and conditions of the Indenture,
as amended. As of January 30, 1999, approximately $5.8 million in principal
amount of notes were outstanding under the Indenture. Holders of approximately
96% of the notes underlying the Indenture agreed to defer payment of their
regularly scheduled July 1, 1998 payment of principal, totaling approximately
$745,000, until May 1, 1999 and 50% of their regularly scheduled January 1, 1999
payment of principal, totaling approximately $372,500, until February 15, 1999.
In exchange for such deferral, the Company issued such holders five-year
warrants to purchase 150,000 of the Company's Common Shares at an exercise price
of $0.75 per share (originally issued at $1.675 per share and repriced at $0.75
per share) and 225,000 of the Company's Common Shares at an exercise price of
$0.01 per share. In addition, the Company has filed a registration statement on
Form S-3 to register the resale of the Common Shares issuable upon exercise of
those warrants.
If the Company's availability under the Foothill/Paragon Facility, trade
credit or sales are lower than expected, or if the Company's borrowing
requirements or liquidity needs are higher than expected, the
16
<PAGE>
Company could have insufficient liquidity to continue its current operations.
Its business, operations, liquidity, financial condition and results of
operations could be materially adversely affected, and the Company could be
required to substantially reduce or discontinue its operations. In addition,
there can be no assurance that the Company will be able to meet the financial
covenants under its borrowing agreements for the next 12 months if sales and if
trade credit substantially decrease from current levels.
INFLATION
The Company does not believe that inflation has had a material effect on the
results of operations during the past three years.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. To distinguish 21st
century dates from 20th century dates, these date code fields must be able to
accept four digit entries. The Company has evaluated its management information
systems (including information technology ("IT") and non-IT computerized
systems) and has prepared a plan for Year 2000 compliance. The Company estimates
that the cost to modify its management information systems to become Year 2000
compliant will be approximately $400,000. Through January 30, 1999, the Company
had spent approximately $35,000 to modify its management information systems to
become Year 2000 compliant. Through April 23, 1999 the Company had spent
approximately $200,000 to become Year 2000 compliant. Given that such
modification is expected to be completed by June 1999, the Company has not
prepared a contingency plan and does not currently believe that a contingency
plan is necessary. The Company is also evaluating the systems of its vendors to
ensure that these companies are Year 2000 compliant. The cost of this evaluation
is expected to be nominal. In the event that its current vendors are unable to
certify that they will be Year 2000 compliant by early 1999 or if such vendors
are unable to certify that their failure to be Year 2000 compliant will not
adversely affect the Company, the Company will be reviewing its alternatives
with respect to other vendors. There can be no assurance that the Company will
be able to find vendors which are acceptable to the Company. The Company does
not anticipate any material disruption in its operations as a result of any
failure by the Company or its vendors to become Year 2000 compliant.
FORWARD-LOOKING STATEMENT
Each of the above statements regarding future revenues, expenses or business
plans (including statements regarding the sufficiency of the Company's cash
resources to meet future liquidity needs and future compliance with financial
covenants) may be a "forward looking statement" within the meaning of the
Securities Exchange Act of 1934. Such statements are subject to important
factors and uncertainties that could cause actual results to differ materially
from those in the forward-looking statement, including the level of support of
the Company's trade creditors and factors, general trends in retail clothing
apparel purchasing, especially during the Christmas season, the Company's
comparable store sales changes, 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.
17
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates, consisting of debt
obligations. The Company's fixed rate debt obligations include the 12.75% Notes
issued under its Indenture. The Company's variable rate debt obligations include
indebtedness under the Foothill/Paragon Facility. For these debt obligations,
the table presents scheduled principal cash flows and related weighted average
interest rates by expected maturity dates for each of the next five years,
aggregate subsequent maturities and the market value of the debt as of January
30, 1999. Weighted average interest rates are based on contractual interest
rates for fixed rate obligations and are based on current rates for variable
rate obligations. The information is presented in U.S. dollars, which is the
Company's reporting currency and the denomination of the debt's actual cash
flows.
<TABLE>
<CAPTION>
JANUARY 30, 1999
EXPECTED MATURITY DATE
------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
--------- --------- --------- --------- --------- ----------- --------- -----------
LIABILITIES (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt:
Fixed Rate......................... $ 4,219 $ 1,623 $ 0 $ 0 $ 0 $ 0 $ 5,842 $ 5,842
Average interest rate............ 12.75% 12.75% 0% N/A N/A N/A 12.75%
Variable Rate...................... $ 0 $ 0 $ 31,809 $ 0 $ 0 $ 0 $ 31,809 $ 31,809
Average interest rate............ 0% 0% 9.05% N/A N/A N/A 9.05%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and other information required by this Item are set
forth in the "Index to Financial Statements" on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 "Election of Directors" in the Company's Proxy Statement in
connection with the 1999 Annual Meeting of Shareholders scheduled to be held
June 22, 1999, and is incorporated in this Item 10 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
1999 Annual Meeting of Shareholders scheduled to be held June 22, 1999, and is
incorporated in this Item 10 by reference.
The following table sets forth information as of April 23, 1999, regarding
the Company's executive officers:
<TABLE>
<CAPTION>
EXECUTIVE
NAME AGE POSITIONS WITH THE COMPANY OFFICER SINCE
- ------------------------------ --- ---------------------------------------------------------------- ---------------
<S> <C> <C> <C>
Arlene H. Stern............... 48 President, Chief Executive Officer and a Director 1996
Dennis Horstman............... 53 Senior Vice President, Merchandising and Marketing 1996
Neal Gottfried................ 56 Senior Vice President, Store Operations and Visual Merchandising 1997
Thomas J. Villano............. 47 Senior Vice President, Chief Financial Officer and Secretary 1999
Diane Abbate-Fox.............. 34 Vice President, General Merchandise Manager 1999
Vicki Boudreaux............... 42 Vice President, Planning and Allocation 1996
Joseph Kuhn................... 41 Vice President, Distribution, Real Estate and Construction 1999
</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 Casual Corner Group,
Inc., a retail apparel specialty store chain and a division of U.S. Shoe
Corporation, from July 1993 to August 1995. Pursuant to a letter agreement,
dated July 8, 1996, as amended, Ms. Stern is to be employed as the Company's
President and Chief Executive Officer until July 7, 2000, unless her employment
is terminated earlier pursuant to the letter agreement.
Dennis Horstman has been the Company's Senior Vice President, Merchandising
and Marketing since December 2, 1996. Prior to joining Gantos, Mr. Horstman was
Senior Vice President/General Merchandise Manager for Petrie Retail, Inc., a
retail apparel specialty store chain, from July 1995 to December 1996. Petrie
Retail, Inc. filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code on October 13, 1995. Mr. Horstman was an executive
officer of Petrie Retail, Inc. at the time of the filing. Prior to Petrie, Mr.
Horstman was President of the Petite Sophisticate Division of Women's Specialty
Group, a retail apparel specialty store chain and a division of U.S. Shoe
Corporation from November 1994 to July 1995. From May 1994 to November 1994, Mr.
Horstman was General Merchandise Manager for the Capezio Sportswear Division of
Women's Specialty Group. From 1991 to 1994, Mr. Horstman was Vice
President/General Merchandise Manager for the Wilsons Leather Division of
Mellville Corporation, a retail apparel specialty store. Pursuant to a letter
agreement, dated November 11, 1996, Mr. Horstman is to be employed at will as
the Company's Senior Vice President, Merchandising and Marketing.
Neal Gottfried has been the Company's Senior Vice President, Store
Operations and Visual Merchandising since April 14, 1997. From January 1994
until April 1997, Mr. Gottfried was the Vice President of Operations for the
Southern Zone of Casual Corner Group, Inc., a retail apparel specialty store
chain and a division of U.S. Shoe Corporation. Pursuant to a letter agreement,
dated April 23, 1997, Mr. Gottfried is
19
<PAGE>
to be employed at will as the Company's Senior Vice President, Store Operations
and Visual Merchandising.
Thomas J. Villano has been the Company's Senior Vice President, Chief
Financial Officer and Secretary since March 1999. He served as a consultant to
the Company from November 1998 until March 1999. Prior to joining Gantos, Mr.
Villano was Chief Financial Officer for Fluid Packaging Co., Inc., a contract
manufacturer of over the counter healthcare products with manufacturing
facilities in the United States and Mexico, from March 1997 to October 1998.
Prior to Fluid Packaging, Mr. Villano was the Chief Financial Officer for
Colotone Group, an international graphic arts firm, from December 1994 to May
1996. As Chief Financial Officer, Mr. Villano had responsibility for finance and
the information services department. In February 1996, Colotone Group filed a
voluntary petition of bankruptcy. Previous to that, from September 1991 to
December 1994, Mr. Villano was Director of Operations/Controller for systems
integrator--Stamford Associates, Inc., where he oversaw the company's financial
and administrative affairs. Pursuant to a letter agreement, dated March 16,
1999, Mr. Villano is to be employed at will as the Company's Senior Vice
President, Chief Financial Officer and Secretary.
Diane Abbate-Fox has been the Company's Vice President, General Merchandise
Manager since March 1999. Ms. Abbate-Fox began her career with Gantos in April
1997 as General Merchandise Manager. Ms. Abbate-Fox came to Gantos from Petrie
Retail, a women's clothing retailer, where Ms. Abbate-Fox was Merchandise
Manager for Contemporary Sportswear from January 1995 to March 1997. Prior to
her employment with Petrie, Ms. Abbate-Fox was the Buyer for Bottoms, Blazer and
Outerwear for the Lerner Division of The Limited, a clothing retailer, from 1987
to December 1995. Pursuant to a letter agreement, dated March 29, 1999, Ms.
Abbate-Fox is to be employed at will as the Company's Vice President, General
Merchandise Manager.
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.
Joseph Kuhn has been the Company's Vice President, Distribution, Real Estate
and Construction since March 1999. Mr. Kuhn began his career with Gantos in 1984
when he joined the organization as a Construction Coordinator. He was promoted
to Construction Manager in 1988 and later to Director of Construction and
Properties. In December of 1990, Mr. Kuhn assumed new responsibilities as the
Director of Distribution. Mr. Kuhn has maintained his involvement in
Construction these past 8 years and has been assisting in Real Estate since last
fall. Pursuant to a letter agreement, dated March 16, 1999, Mr. Kuhn is to be
employed at will as the Company's Vice President, Distribution, Real Estate and
Construction. Mr. Kuhn is a son-in-law of L. Douglas Gantos, a director of the
Company.
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 1999 Annual Meeting of Shareholders scheduled to be held June 22, 1999,
and, except for the information under the caption "Board Compensation Committee
Report on Executive Compensation" or "Performance Graph", is incorporated in
this Item 11 by reference.
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 1999 Annual Meeting of Shareholders scheduled to be held
June 22, 1999, and is incorporated in this Item 12 by reference.
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 1999 Annual Meeting of
Shareholders scheduled to be held June 22, 1999, and is incorporated in the Item
13 by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(A)(1) FINANCIAL STATEMENTS
The list of the report, financial statements and notes required by this Item
14(a)(1) is set forth in the "Index to Financial Statements" on page F-1 of this
Report.
14(A)(2) FINANCIAL STATEMENT SCHEDULES
The Financial Statement Schedule required by this Item 14(a)(2) is set forth
in the "Index to Financial Statements" on page F-1 of this Report.
14(A)(3) EXHIBITS
The list of exhibits required by this Item 14(a)(3) is set forth in the
"Index to Exhibits" following the Financial Statements in this Report.
14(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
ended January 30, 1999.
21
<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 27, 1999
<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 27, 1999
Arlene H. Stern Officer)
Senior Vice President, and
/s/ THOMAS J. VILLANO Chief Financial Officer
- -------------------------------- (Principal Financial and April 27, 1999
Thomas J. Villano Accounting Officer)
/s/ L. DOUGLAS GANTOS
- -------------------------------- Director April 27, 1999
L. Douglas Gantos
/s/ ELIZABETH M. EVEILLARD
- -------------------------------- Director April 27, 1999
Elizabeth M. Eveillard
/s/ FRED K. SCHOMER
- -------------------------------- Director April 27, 1999
Fred K. Schomer
/s/ HANNAH H. STRASSER
- -------------------------------- Director April 27, 1999
Hannah H. Strasser
/s/ MARY ELIZABETH BURTON
- -------------------------------- Director April 27, 1999
Mary Elizabeth Burton
/s/ ERWIN A. MARKS
- -------------------------------- Director April 27, 1999
Erwin A. Marks
/s/ S. AMANDA PUTNAM
- -------------------------------- Director April 27, 1999
S. Amanda Putnam
</TABLE>
22
<PAGE>
GANTOS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants........................................................................ F-2
Financial Statements
Balance Sheets......................................................................................... F-3
Statements of Income (Loss)............................................................................ F-4
Statements of Changes in Shareholders' Equity.......................................................... F-5
Statements of Cash Flows............................................................................... F-6
Notes to Financial Statements.......................................................................... F-7-17
Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts........................................................... F-18
</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 30, 1999 and January 31, 1998, and the results of its operations and
cash flows for each of the three years in the period ended January 30, 1999, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule 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 has 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.
PRICEWATERHOUSECOOPERS LLP
Battle Creek, Michigan
April 13, 1999
F-2
<PAGE>
GANTOS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 1,275 $ 1,295
Accounts receivable, less allowance for doubtful accounts of $577 and $591 at January
30, 1999 and January 31, 1998, respectively......................................... 17,634 18,607
Merchandise inventories............................................................... 27,808 22,540
Prepaid expenses and other............................................................ 8,053 8,205
----------- -----------
Total current assets................................................................ 54,770 50,647
----------- -----------
Property and equipment, at cost:
Leasehold improvements................................................................ 31,290 30,506
Furniture and fixtures................................................................ 31,813 31,517
Other................................................................................. 88 122
----------- -----------
Total property and equipment........................................................ 63,191 62,145
Less--accumulated depreciation and amortization....................................... (52,229) (48,115)
----------- -----------
Net property and equipment.............................................................. 10,962 14,030
Other assets............................................................................ 921 517
----------- -----------
Total assets............................................................................ $ 66,653 $ 65,194
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 12,189 $ 7,644
Accrued payroll....................................................................... 1,085 1,081
Accrued expenses and other............................................................ 6,407 7,391
----------- -----------
Total current liabilities........................................................... 19,681 16,116
Long-term debt.......................................................................... 37,651 27,398
Shareholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized; none issued Common
stock, $.01 par value, 20,000,000 shares authorized; 7,820,000 issued and
outstanding at January 30, 1999 and 7,583,000 issued and outstanding at January 31,
1998................................................................................ 78 76
Additional paid-in capital............................................................ 41,433 40,977
Accumulated deficit................................................................... (32,190) (19,373)
----------- -----------
Total shareholders' equity.............................................................. 9,321 21,680
----------- -----------
Total liabilities and shareholders' equity.............................................. $ 66,653 $ 65,194
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of the
financial statements.
F-3
<PAGE>
GANTOS, INC.
STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales.................................................................. $ 149,625 $ 161,966 $ 184,366
Cost of sales (including buying, distribution and occupancy costs)......... (124,833) (137,237) (147,022)
----------- ----------- -----------
Gross income............................................................... 24,792 24,729 37,344
Selling, general and administrative expense................................ (36,337) (38,807) (37,407)
Finance charge and other revenue........................................... 4,562 4,843 4,732
Merger termination expense (Note 4)........................................ (823)
Relocation severance provision (Note 3).................................... (400)
----------- ----------- -----------
Operating income (loss).................................................... (7,806) (9,235) 4,269
Interest expense........................................................... (4,791) (2,341) (2,332)
----------- ----------- -----------
Income (loss) before extraordinary item and income taxes................... (12,597) (11,576) 1,937
Income tax benefit......................................................... 615
----------- ----------- -----------
Net income (loss) before extraordinary item................................ (12,597) (10,961) 1,937
Extraordinary item--net of income taxes
Loss on early extinguishment of debt (Note 5)............................ (220)
----------- ----------- -----------
Net income (loss).......................................................... $ (12,817) $ (10,961) $ 1,937
----------- ----------- -----------
----------- ----------- -----------
Per share amounts:
Basic and diluted earnings per share:
Income (loss) before extraordinary item................................ $ (1.65) $ (1.45) $ .26
Extraordinary loss..................................................... (0.03)
----------- ----------- -----------
Net income (loss) per share................................................ $ (1.68) $ (1.45) $ .26
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of the
financial statements.
F-4
<PAGE>
GANTOS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ----------- ----------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at February 3, 1996........................ 7,577 $ 76 $ 40,603 $ (10,349) $ 30,330
Restricted stock compensation expense.............. 142 142
Cancellation of restricted stock................... (34)
Exercise of stock options.......................... 2 8 8
Shares issued under employee stock purchase plan... 18 45 45
Net income for the year............................ 1,937 1,937
----- --- ----------- ------------ -------------
Balance at February 1, 1997........................ 7,563 76 40,798 (8,412) 32,462
----- --- ----------- ------------ -------------
Restricted stock compensation expense.............. 109 109
Cancellation of restricted stock................... (14)
Cancellation of old common stock................... (28)
Shares issued under employee stock purchase plan... 62 70 70
Net loss for the year.............................. (10,961) (10,961)
----- --- ----------- ------------ -------------
Balance at January 31, 1998........................ 7,583 76 40,977 (19,373) 21,680
Restricted stock compensation expense.............. 11 11
Issuance of warrants to bondholders................ 394 394
Exercise of warrants............................... 136 1 1
Shares issued under employee stock purchase plan... 101 1 51 52
Net loss for the year.............................. (12,817) (12,817)
----- --- ----------- ------------ -------------
Balance at January 30, 1999........................ 7,820 $ 78 $ 41,433 $ (32,190) $ 9,321
----- --- ----------- ------------ -------------
----- --- ----------- ------------ -------------
</TABLE>
The accompanying notes to financial statements are an integral part of the
financial statements.
F-5
<PAGE>
GANTOS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................ $ (12,817) $ (10,961) $ 1,937
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Relocation severance provision......................................... 400
Cash used for relocation severance and other........................... (400) (9)
Depreciation and amortization.......................................... 4,443 4,782 5,493
Restricted stock compensation expense.................................. 11 109 142
Warrant expense........................................................ 110
Other.................................................................. 133
Changes in assets and liabilities:
Accounts receivable.................................................... 973 3,366 646
Merchandise inventories................................................ (5,268) (167) 1,582
Prepaid expenses and other............................................. 152 (5,034) (320)
Accounts payable....................................................... 4,545 (3,105) (1,370)
Accrued expenses and other............................................. (980) (1,835) (2,410)
----------- ----------- -----------
Total adjustments.......................................................... 4,119 (2,284) 4,154
----------- ----------- -----------
Net cash (used in) provided by operating activities.................. (8,698) (13,245) 6,091
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures..................................................... (1,079) (4,901) (2,696)
----------- ----------- -----------
Net cash used by investing activities.................................. (1,079) (4,901) (2,696)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments under capital lease obligations and other long-term
debt................................................................... (1,980) (4,119) (455)
Issuance of Common Stock................................................. 53 70 54
Borrowings under revolving credit notes payable.......................... 167,809 204,550 206,467
Repayments under revolving credit notes payable.......................... (155,577) (184,973) (206,568)
Other.................................................................... (548) (433)
----------- ----------- -----------
Net cash provided by (used in) financing activities.................... 9,757 15,095 (502)
Net (decrease) increase in cash............................................ (20) (3,051) 2,893
Cash and cash equivalents at beginning of year............................. 1,295 4,346 1,453
----------- ----------- -----------
Cash and cash equivalents at end of year................................... $ 1,275 $ 1,295 $ 4,346
----------- ----------- -----------
----------- ----------- -----------
Cash paid during the year:
Interest................................................................. $ 4,898 $ 2,378 $ 1,818
Income taxes............................................................. $ -- $ 92 $ 54
</TABLE>
The accompanying notes to financial statements are an integral part of the
financial statements.
F-6
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 30, 1999
1. 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 1998 consisted of fifty-two weeks and ended on January 30,
1999; fiscal year 1997 consisted of fifty-two weeks and ended on January 31,
1998; and fiscal year 1996 consisted of fifty-two weeks and ended on February 1,
1997.
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.
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 $2.0 and
$1.4 million of merchandise development, procurement, storage and distribution
costs are included in inventory at year end 1998 and 1997, respectively.
The realizability of long-term assets is evaluated periodically when events
or circumstances indicate a possible inability to recover the carrying amount.
Evaluation is based on various analyses, including anticipated future cash flows
and fair market value estimates.
Commissions earned on leased shoe sales are included in net sales and
totaled $737,000 in 1998, $889,000 in 1997 and $874,000 in 1996. Third party
leased shoe sales totaled $5.2, $6.4 and $6.5 million in 1998, 1997 and 1996,
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 in both 1998 and 1997 and $1.2
million in 1996.
Basic net earnings per share is determined by dividing net earnings by the
weighted average number of common shares outstanding during the period. The
weighted average number of common shares outstanding was 7,651,000 in 1998,
7,550,000 in 1997, and 7,574,000 in 1996. 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 common stock warrants issued in 1998 and
employee stock options issued by the Company and had an insignificant impact on
the computation of
F-7
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
diluted net earnings per share during 1996. As a result of the net loss in 1998
and 1997, dilutive net earnings per share were computed in the same manner as
basic net earnings per share for these periods.
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."
During 1998, approximately 28,000 common shares were forfeited under the
provisions of the Company's 1995 Plan of Reorganization.
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.
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 30, 1999, the Company incurred a loss
of $12.8 million and has experienced continued tight trade credit. These factors
among others may indicate that the Company may be unable to continue as a going
concern. The Company will engage a financial advisor to assist management in
exploring various 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 Foothill/Paragon Facility and the Indenture, support from trade creditors,
and future profitable operations.
3. PROVISION FOR SEVERANCE
During 1996, the Company made the decision to relocate its corporate offices
to Stamford, Connecticut. In connection with this decision, an announcement was
made in January 1997 related to severance plans for employees terminated as a
result of this relocation. Accordingly, in the fourth quarter of 1996, a reserve
of $.4 million was recorded based upon management's calculations of the
anticipated severance costs. During 1997, actual severance payments were $.4
million.
F-8
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 30, 1999
4. MERGER TERMINATION EXPENSE
On May 12, 1998, the Company announced it had entered into a definitive
Agreement and Plan of merger (the "Merger Agreement") with Hit or Miss, Inc. and
HOM Holding, Inc., the sole stockholder of Hit or Miss. During the third
quarter, the Board of Directors authorized the Company to terminate the Merger
Agreement. As a result of the termination, the Company recorded as expense the
costs of the proposed merger, including financial advisor and professional fees.
This expense of approximately $823,000 was recorded as merger termination
expense.
5. LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
(THOUSANDS)
<S> <C> <C>
Revolving Credit Agreements bearing interest at variable rates...... $ 31,809 $ 19,577
Notes issued pursuant to an Indenture Agreement bearing interest at
12.75%............................................................. 5,842 7,821
----------- -----------
$ 37,651 $ 27,398
----------- -----------
----------- -----------
</TABLE>
On November 18, 1998, the Company entered into a Loan and Security Agreement
with Foothill Capital Corporation and Paragon Capital LLC (the "Foothill/Paragon
Facility"), replacing its Revolving Credit Agreement with Fleet Bank N.A. The
Company amended the Foothill/Paragon Facility as of February 28, 1999. The
Foothill/Paragon Facility expires November 18, 2001, and it provides the Company
with revolving credit loans and letters of credit up to $40 million, subject to
a borrowing base formula and lender reserves (as defined in the agreement).
Undrawn and unreimbursed letters of credit under the facility may not exceed
$5,000,000 in face amount. Loans under the Foothill/Paragon Facility generally
bear interest at Norwest Bank Minnesota's base rate plus 1.5%, except for
special advances based on a higher inventory advance rate which bear interest at
the base rate plus 4.0%. The interest is payable in arrears on the first day of
each month. As of January 30, 1999, the Norwest Bank Minnesota base rate was
7.75%.
The Foothill/Paragon Facility carries annual commitment fees, payable
monthly, of 0.5% of the difference between $40 million and the average amount
outstanding under the facility (including the face amount of letters of credit)
and 1.5% of the face amount of outstanding letters of credit. The Company paid a
$400,000 origination fee to Foothill/Paragon and must pay annual fees of
$200,000 and $100,000 on November 18, 1999 and November 18, 2000, respectively
to Foothill/Paragon. The Company must also pay servicing fees of $4,000 a month,
which increase to $9,000 a month if the Company requests any special advances.
The Foothill/Paragon Facility provides for a $1,200,000, $800,000 or $400,000
termination fee if the credit facility is terminated before November 18, 1999,
November 18, 2000 or November 18, 2001, respectively.
The Foothill/Paragon Facility is secured by substantially all of the
Company's assets. The Foothill/ Paragon Facility contains, among other things,
covenants with respect to (i) additional indebtedness, (ii) prohibitions on
making distributions (including dividends), (iii) investments, (iv) minimum net
worth, and (v) minimum earnings before interest, taxes, depreciation and
amortization; and retail performance
F-9
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 30, 1999
5. LONG-TERM DEBT (CONTINUED)
covenants with respect to (i) maximum capital expenditures, (ii) minimum and
maximum inventory levels, (iii) minimum purchases, and (iv) minimum sales.
As of January 30, 1999, the Company had $31.8 million in borrowings and $1.4
million in letters of credit outstanding under the Foothill/Paragon Facility,
and approximately $1.4 million was available for borrowing under the
Foothill/Paragon Facility.
In March 1995, the Company issued approximately $12.4 million in original
principal amount of six-year notes bearing interest payable quarterly at 12.75%
(the "Notes"). The Notes were issued pursuant to an Indenture, dated as of April
1, 1995, between the Company and State Street Bank and Trust Company (formerly
Fleet Bank, N.A. and Shawmut Bank Connecticut, National Association) (the
"Indenture"). The Notes are payable in quarterly installments of approximately
$775,000 beginning July 1, 1997 and ending September 1, 2000. 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
Foothill/Paragon 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
Foothill/Paragon 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 1998 and 1997, the Company did not have Excess Cash
Flow and accordingly, was not required to make an Excess Cash Flow payment.
The Notes are secured by a $5,000,000 life insurance policy on the life of a
certain director of the Company until the Notes are transferred to a third
party. The Notes secured by the policy must be prepaid with any proceeds from
the life insurance policy. The Indenture contains, among other things, covenants
with respect to (i) additional indebtedness, (ii) minimum net worth and (iii)
prohibitions on paying dividends.
As a result of failure to meet certain covenants, 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 was based
on a liquidity test as long as minimum levels of liquidity were maintained under
the then existing 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, was also amended effective as of June 30, 1998 to cure
potential defaults under the Indenture. Previous covenants concerning capital
expenditures, earnings before interest, taxes, depreciation and amortization,
and interest coverage ratios were deleted from the Indenture. The remaining net
worth covenant requires the Company to maintain a minimum net worth of $4.5
million at the end of each
F-10
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 30, 1999
5. LONG-TERM DEBT (CONTINUED)
quarter through the third quarter of fiscal 2000 and $6.0 million at the end of
each subsequent quarter. As of January 30, 1999, the Company's net worth was
approximately $9.3 million. As of January 30, 1999, approximately $5.8 million
in principal amount of notes were outstanding under the Indenture.
Holders of approximately 96% of the notes underlying the Indenture agreed to
defer payment of their regularly scheduled July 1, 1998 payment of principal,
totaling approximately $745,000, until May 1, 1999 and 50% of their regularly
scheduled January 1, 1999 payment of principal, totaling approximately $372,500,
until February 15, 1999. In exchange for such deferral, the Company issued such
holders five-year warrants to purchase 150,000 of the Company's Common Shares at
an exercise price of $0.75 per share (the original warrants were issued at
$1.675 per share in July 1998 and repriced to $0.75 per share in November 1998)
and 225,000 of the Company's Common Shares at an exercise price of $0.01 per
share. The Company has filed a registration statement on Form S-3 to register
the resale of the Common Shares issuable upon exercise of those warrants. All
stock warrants issued under this arrangement were immediately vested and had a
term of 5 years. The fair value of stock warrants issued, approximately
$394,000, was capitalized as debt costs and will be charged to interest expense
over the remaining term of the Notes using the interest method. The Company
recognized $110,000 of expense during the year ended January 30, 1999 related to
the warrants. On January 26, 1999, 136,485 of the warrants, with an exercise
price of $.01, were exercised.
In November 1998, the Company terminated its Revolving Credit Agreement with
Fleet Bank N.A. Payment of $220,000 ($.03 per share) in termination and other
fees resulted in an extraordinary loss during the year ended January 30, 1999.
If the Company's availability under the Foothill/Paragon Facility, trade
credit or sales are lower than expected, or if the Company's borrowing
requirements or liquidity needs are higher than expected, the Company could have
insufficient liquidity to continue its current operations. Its business,
operations, liquidity, financial condition and results of operations could be
materially adversely affected, and the Company could be required to
substantially reduce or discontinue its operations. In addition, there can be no
assurance that the Company will be able to meet the financial covenants under
its borrowing arrangements for the next 12 months unless sales and trade credit
substantially improve.
F-11
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 30, 1999
6. INCOME TAXES
The Company's income tax benefit is composed of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal
Current.......................................... $ -- $ 615 $ --
Deferred......................................... -- -- --
--------- --------- ---------
-- 615 --
--------- --------- ---------
State
Current.......................................... -- -- --
Deferred......................................... -- -- --
--------- --------- ---------
-- -- --
--------- --------- ---------
Income tax benefit................................. $ -- $ 615 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The effective tax rate varies from the statutory rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate.................................. 35.0% 35.0% 35.0%
Effect of graduated tax rate.................... (1.0)% (1.0)% (1.0)%
Change in valuation allowance................... (34.0)% (34.0)% (34.0)%
Reversal of tax reserves........................ 5.3%
--------- --------- ---------
0.0% 5.3% 0.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," requires that deferred income taxes be recorded for "temporary
differences" between the basis of assets and liabilities for financial reporting
purposes and such amounts as determined by tax regulations. This method requires
that deferred taxes be recorded based upon currently enacted tax rates.
Based on the Company's current financial status, realization of the
Company's deferred tax assets does not meet the "more likely than not" criteria
under SFAS No. 109 and accordingly a valuation allowance for the entire net
deferred tax asset amount has been recorded.
F-12
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 30, 1999
6. INCOME TAXES (CONTINUED)
The components of the net deferred tax asset (liability) and the related
valuation allowance are as follows:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
(THOUSANDS)
<S> <C> <C>
NOL carryforward.................................................... $ 14,461 $ 9,580
Tax credit carryforward............................................. 3,520 3,520
Other accrued expenses.............................................. 1,281 1,710
Property and equipment.............................................. 1,420 960
Other............................................................... 135 160
----------- -----------
Deferred tax assets................................................. 20,817 15,930
----------- -----------
Inventory........................................................... (1,295) (930)
Prepaid expenses.................................................... (614) (680)
Property taxes...................................................... (523) (530)
----------- -----------
Deferred tax liabilities............................................ (2,432) (2,140)
----------- -----------
Subtotal............................................................ 18,385 13,790
----------- -----------
Valuation allowance................................................. (18,385) (13,790)
----------- -----------
Net deferred tax assets (liabilities)............................... $ -- $ --
----------- -----------
----------- -----------
</TABLE>
At January 30, 1999, the Company had net operating loss carryforwards
available to offset future income for federal income tax reporting purposes of
approximately $44.0 million, expiring in 2007-2019.
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.
7. 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 eleven
years. Generally, the store leases contain provisions for additional rentals
based on a percentage of sales. Total rent expense under these leases was
approximately $16.1, $16.0 and $15.9 million in 1998, 1997 and 1996,
respectively, which includes percentage of sales rentals of $0.1 million in
1996. Accrued rent expense of $3.0 million at January 30, 1999 and $3.9 million
at January 31, 1998 is included in accrued expenses.
F-13
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 30, 1999
7. LEASES (CONTINUED)
Estimated future minimum rental payments are as follows:
<TABLE>
<CAPTION>
LEASES
-----------
(THOUSANDS)
<S> <C>
YEAR
- ---------------------------------------------------------------------------------
1999............................................................................. $ 15,977
2000............................................................................. 13,848
2001............................................................................. 9,868
2002............................................................................. 6,700
2003............................................................................. 2,899
Thereafter....................................................................... 7,902
-----------
Total minimum lease payments..................................................... $ 57,194
-----------
-----------
</TABLE>
8. 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 1998, the Company issued options to purchase 130,500 shares under the
1996 Plan at an exercise price of $.91. These options become exercisable over a
five-year period. The number of shares available for grant under the 1996 Plan
as of January 30, 1999 is 382,500.
The Gantos, Inc. Stock Option Plan (the "1986 Plan") expired March 19, 1996.
During 1995, as part of the Company's Plan of Reorganization, the Company issued
200,000 restricted shares to key management employees which vested 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.
F-14
<PAGE>
GANTOS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 30, 1999
8. STOCK OPTION PLANS (CONTINUED)
The total number of options that remain outstanding under the 1986 Plan is
271,000 and they 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 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 1998, 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 30, 1999 was 40,000.
A summary of activity for the three years ended January 30, 1999 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 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
Granted.................................. 137 137 $ 0.38-0.91
Exercised................................ -- (28) (28) $ 4.16
Canceled................................. (225) (225) $ 0.91-4.69
----- --- ----- -----------
Outstanding January 30, 1999............. 949 949 $ 0.38-4.69
----- --- ----- -----------
----- --- ----- -----------
Exercisable.............................. 580 580 $ 0.38-4.69
----- --- ----- -----------
----- --- ----- -----------
</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
F-15
<PAGE>
GANTOS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 30, 1999
8. STOCK OPTION PLANS (CONTINUED)
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Risk free interest rate................................... 7% 7% 7%
Dividend rate............................................. 0% 0% 0%
Volatility................................................ 123.2% 110.9% 83.9%
Average expected term..................................... 5 Years 5 Years 5 Years
</TABLE>
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 February
3, 1996, are estimated to be:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
(THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Compensation expense recognized for stock options........... $ 474 $ 440 $ 660
Net income (loss)........................................... $ (13,291) $ (11,401) $ 1,277
Net income (loss) per share (basic and dilulted)............ $ (1.74) $ (1.51) $ .17
</TABLE>
Employee stock options outstanding and exercisable under these plans as of
January 30, 1999 were:
<TABLE>
<CAPTION>
OUTSTANDING
--------------------------------------------------- EXERCISABLE
WEIGHTED AVERAGE ------------------------------
WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE
RANGE OF PRICES SHARES EXERCISE PRICE CONTRACTUAL LIFE SHARES EXERCISE PRICE
- --------------------- ----------- ----------------- ------------------- ----------- -----------------
(THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
$0.38-0.91........... 82 $ 0.89 9.3 6 $ 0.38
$2.00-2.99........... 153 $ 2.17 6.3 30 $ 2.19
$3.00-3.99........... 119 $ 3.43 7.4 66 $ 3.42
$4.00-4.99........... 595 $ 4.42 6.9 478 $ 4.40
--- ----- --- --- -----
949 580
--- ---
--- ---
</TABLE>
9. 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
1998, 101,329 shares were issued under the ESPP for $52,000. As of January 30,
1999, there are 19,533 shares reserved for future issuance under the ESPP.
F-16
<PAGE>
GANTOS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 30, 1999
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998
Net sales....................................... $ 39,063 $ 31,758 $ 35,446 $ 43,358
Gross income.................................... 8,170 3,362 6,231 7,029
Net loss before extraordinary item.............. (745) (4,952) (4,017) (2,883)
Net loss........................................ (745) (4,952) (4,017) (3,103)
Net loss per share before extraordinary item
(basic and diluted)........................... (.10) (.65) (.52) (.37)
1997
Net sales....................................... $ 45,564 $ 35,816 $ 35,478 $ 45,108
Gross income.................................... 10,348 4,165 5,451 4,765
Net income (loss)............................... 1,455 (4,714) (3,388) (4,314)
Net income (loss) per share (basic and
diluted)...................................... .19 (.62) (.45) (.57)
</TABLE>
The sum of the quarterly net income (loss) per share amounts for the periods
presented may not equal the annual amount reported because net income (loss) per
share is computed independently for each quarter.
11. OPERATING SEGMENTS
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information," which requires certain information to be
reported about operating segments consistent with management's internal view of
the Company.
The Company has a single operating segment; women's retail clothing stores.
The Company has no organizational structure dictated by product lines, geography
or customer type. Profitability is evaluated at the store level. Retail sales
are derived from one product line, women's clothing, and are to retail customers
in the U.S. Long-lived assets are located exclusively in the U.S.
F-17
<PAGE>
GANTOS INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- -------------------------------------------------- --------------- ----------- ----------- ----------- -------------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1998............................................ $ 591 $ 981 -- $ 995 $ 577
1997............................................ 636 1,320 -- 1,365 591
1996............................................ 572 1,226 -- 1,162 636
</TABLE>
F-18
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.
DOCUMENT NUMBER AND DESCRIPTION
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) Amended and Restated Bylaws, as amended November 13, 1998,
incorporated by reference to Exhibit 3(ii) to the Company's Quarterly
Report on Form 10-Q for the quarter ended October 31, 1998.
4.1 Form of Indenture between Gantos, Inc. and Shawmut Bank Connecticut,
National Association, as Trustee, including forms of notes attached as
exhibits, a reasonably 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.
4.2 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), as
Trustee, and Agreement, dated as of December 15, 1997, between Elliott
Associates, L.P. and Gantos, Inc., incorporated by reference to
Exhibit 4.3 to the Company's Annual Report on form 10-K for the fiscal
year ended January 31, 1998.
4.3 Restated Supplemental Indenture No. 2, dated as of June 30, 1998, to
Indenture dated as of April 1, 1995 between Gantos, Inc. and State
Street Bank and Trust Company (successor to Fleet Bank, N.A., which
was the successor to Shawmut Bank Connecticut, National Association),
as Trustee, and agreement dated as of June 30, 1998 by and among
Gantos, Inc., State Street Bank and Trust Company, as Trustee, and
Elliott Associates, L.P., incorporated by reference to Exhibit 4.5 to
the Company's Registration Statement on Form S-3 (file no. 333-68545)
filed with the Securities and Exchange Commission on December 8, 1998.
4.4 Agreements, dated as of September 25, 1998, between Gantos, Inc., and
State Street Bank and Trust Company, as Trustee, and Agreements, dated
as of September 24, 1998, between Gantos, Inc., and various holders of
Notes issued under the Indenture, incorporated by reference to
Exhibit 4.6 to the Company's Registration Statement on Form S-3 (file
no. 333-68545) with the Securities and Exchange Commission on filed
December 8, 1998.
<PAGE>
EXHIBIT INDEX
DOCUMENT NUMBER AND DESCRIPTION
4.5 Agreements, dated as of November 13, 1998, between Gantos, Inc., and
various holders of Notes issued under the Indenture, incorporated by
reference to Exhibit 4.7 to the Company's Registration Statement on
Form S-3 (file no. 333-68545) filed with the Securities and Exchange
Commission on December 8, 1998.
4.6 Form of Amended and Restated Common Share Purchase Warrant, dated as
of November 13, 1998, by and between Gantos, Inc. and certain
noteholders, incorporated by reference to Exhibit 4.8 to the Company's
Registration Statement on Form S-3 (file no. 333-68545) filed with the
Securities and Exchange Commission on December 8, 1998.
4.7 Form of Common Share Purchase Warrant, dated as of November 13, 1998,
by and between Gantos, Inc. and certain noteholders, incorporated by
reference to Exhibit 4.9 to the Company's Registration Statement on
Form S-3 (file no. 333-68545) filed with the Securities and Exchange
Commission on December 8, 1998.
4.8 Loan and Security Agreement, dated as of November 18, 1998, among
Gantos, Inc., the financial institutions named therein, and Foothill
Capital Corporation, as Agent, incorporated by reference to Exhibit
4.10 to the Company's Registration Statement on Form S-3 (file no.
333-68545) filed with the Securities and Exchange Commission on
December 8, 1998.
4.9 First Amendment to Loan and Security Agreement, dated as of February
28, 1999, by and among Gantos, Inc., the financial institutions named
therein, and Foothill Capital Corporation, as agent.
10.1 Lease Agreement between Gantos, Inc. and First Industrial Financing
Partnership, L.P., dated as of January 28, 1997, incorporated by
reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the year ended February 1, 1997.
10.2 Lease Agreement between Gantos, Inc. and Soundview Plaza Associates,
dated as of January 23, 1997, incorporated by reference to Exhibit
10.6 to the Company's Annual Report on Form 10-K for the year ended
February 1, 1997.
10.3 Lease Modification Agreement between Gantos, Inc. and Soundview Plaza
Associates, dated as of February 10, 1997, incorporated by reference
to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
year ended February 1, 1997.
10.4 Form of Gantos, Inc. credit card application and agreement,
incorporated by reference to Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended February 1, 1997.
10.5 License Agreement, dated as of October 15, 1982, as amended by
amendments one through four, between Gantos, Inc. and Sherman and
Sons, Inc., incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended January 30, 1988.
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.
<PAGE>
EXHIBIT INDEX
DOCUMENT NUMBER AND DESCRIPTION
*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 1998 Gantos, Inc. Executive Bonus Plan, adopted May 19, 1998,
incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 1, 1998.
*10.13 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.
*10.14 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.
*10.15 Termination Agreement, dated May 12, 1998, between Gantos, Inc. and
Arlene H. Stern, incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended May 2,
1998.
*10.16 Amendment, dated as of May 19, 1998, to Letter Agreement, dated as of
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 October 31, 1998.
*10.17 Amendment, dated as of March 16, 1999, to Letter Agreement, dated as
of June 20, 1996, between Gantos, Inc. and Arlene H. Stern.
*10.18 Letter of Employment, dated November 1, 1996, between Gantos, Inc. and
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.
*10.19 Amendment, dated as of March 16, 1999, to Letter Agreement, dated as
of November 1, 1996, between Gantos, Inc. and Dennis Horstman.
*10.20 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.
*10.21 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.
*10.22 Amendment, dated as of October 2, 1998, to Letter Agreement, dated as
of September 3, 1`996, between Gantos, Inc. and Vicki Boudreaux,
incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended October 31, 1998.
<PAGE>
EXHIBIT INDEX
DOCUMENT NUMBER AND DESCRIPTION
*10.23 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.
*10.24 Letter of Employment, dated March 27, 1995, between Gantos, Inc. and
Mr. L. Douglas Gantos, 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.
*10.25 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.
*10.26 Letter of Employment, dated March 16, 1999, between Gantos, Inc. and
Thomas J. Villano.
*10.27 Letter of Employment, dated March 16, 1999, between Gantos, Inc. and
Joseph B. Kuhn.
*10.28 Letter of Employment, dated March 16, 1999, between Gantos, Inc. and
Diane Abbate-Fox.
*10.29 Letter Agreement, dated as of February 13, 1998, between Gantos, Inc.
and PaineWebber Incorporated, incorporated by reference to Exhibit
10.31 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1998.
23.1 Consent of independent accountants.
27.1 Financial Data Schedule.
<PAGE>
EXHIBIT 10.1
GANTOS
March 16, 1999
Mr. Thomas J. Villano
1266 East Main Street, 5th Floor
Stamford, Connecticut 06902
Dear Tom:
We are very pleased to offer you the position of Senior Vice President
and Chief Financial Officer for Gantos, Inc. (the "Company"). We are very
excited to invite you to join our senior management team. The terms of our
offer supersede any of our prior discussions and agreements, and are as
follows:
1. Your initial annual salary will be $165,000.
2. Your date of employment in this position will begin on March 16, 1999
("Start Date").
3. You will be eligible to participate in the Gantos, Inc. Executive Bonus
Plan, beginning with the 1999 plan, if any, when adopted. A copy of the 1998
plan is enclosed. If the 1999 plan is the same as the 1998 plan, your 1999
bonus will be based on the Company's profitability, with 50% of your bonus to be
automatically earned and payable upon the achievement of earnings in excess of
the target and to be automatically allocated to the participants based on the
1999 Gantos base salary actually paid to them. The Compensation Committee will
determine, in its discretion, what portion, if any, of the remaining bonus pool
would be paid to you.
4. On the Start Date, you will be granted an option to purchase 50,000 Gantos,
Inc. common shares at an exercise price equal to the fair market value of
Gantos, Inc. common shares on the Start Date. The option will vest in one-fifth
(1/5) cumulative annual installments, beginning on the first anniversary of the
Start Date. Thereafter, you will be eligible for annual stock option grants in
amounts commensurate with your position with the Company at the discretion of
the Board of Directors or its Compensation Committee.
5. You will receive twelve (12) months separation pay as your exclusive
severance benefits in the event that your employment is terminated without
cause (and other than pursuant to your death or disability) within the first
twenty-four (24) months of your employment under this Agreement. As a
condition of your receipt of severance pursuant to this agreement, after any
termination you must (a) use your best efforts to seek and obtain new
employment, and (b) advise the Company, on a timely and regular basis, of the
status of your efforts, of the terms of any employment (including
self-employment), and of any remuneration you receive from such employment.
If at any time the Company, in good faith, determines that you are not so
seeking such employment, your right to receive severance benefits will be
immediately terminated. The severance benefits to which you would otherwise
be entitled will be reduced by the remuneration that is paid or payable to
you (whether as salary, bonus, commissions, consulting fees, compensation and
dividends from any entity owned by you or a sole proprietorship established
by you or otherwise) from rendering any services to any person, corporation
or entity during the period that you are eligible to receive severance
benefits under this agreement. Payment on account of death or
<PAGE>
disability or for termination without cause after the first twenty-four (24)
months of employment under this Agreement will be in accordance with the
Company policies concerning these areas. You will be entitled to no
severance benefits if you terminate your employment with the Company.
6. To assist you in traveling to the Company's Stamford, Connecticut offices,
the Company will pay you a $750 a month travel allowance while you are employed
by the Company.
7. You will receive such benefits as the Company provides its other Vice
Presidents. Currently the Company provides (i) a non-contributory group life
insurance policy in the amount of one times your annual base compensation,
(ii) an individual disability policy which provides benefits equal to 60% of
your salary, (iii) a 30% discount on all merchandise purchases at our regular
price stores, (iv) medical prescription coverage under our plan on the first
day of the month following two months of employment, (v) on the first day of
the month after two months of employment, dental coverage under our plan, and
(vi) four weeks vacation a year. Enclosed is a complete breakdown of our
benefit plans for your information and review.
8. Your employment will be at will and may be terminated by either of us, with
or without cause, reason or notice. Upon such a termination, as your exclusive
severance benefits, you will be entitled to your salary through the termination
date and amounts, if any, payable to you or your estate as described in
paragraph 5 above, if such termination is without cause and occurs within the
first twenty-four (24) months of your employment under this Agreement, or
amounts payable under any Company policies then applicable to you if such
termination is on account of death or disability, on account of termination for
cause, or on account of termination without cause after the first twenty-four
(24) months of your employment under this Agreement, and, in either case, no
other payment.
9. You will comply with, and be bound by, all Company policies, procedures and
guidelines, as they may be amended and supplemented from time to time during
your employment with the Company.
Please date, sign and return the enclosed copy of this letter to indicate
your acceptance of employment on these terms.
If I can be of assistance in answering any questions that you may have,
please don't hesitate to contact my office.
Very truly yours,
GANTOS, INC.
By:
Arlene H. Stern
Its: President
Accepted and agreed on March 16, 1999
<PAGE>
Thomas J. Villano
EXHIBIT 10.2
GANTOS
March 16, 1999
Mr. Joseph Kuhn
1266 East Main Street, 5th Floor
Stamford, Connecticut 06902
Dear Joe:
We are very pleased to offer you the position of Vice President,
Distribution, Real Estate and Construction for Gantos, Inc. (the "Company").
We are very excited to invite you to join our senior management team. The
terms of our offer supersede any of our prior discussions and agreements, and
are as follows:
1. Your initial annual salary will be $105,000.
2. Your date of employment in this position will begin on March 16, 1999
("Start Date").
3. You will be eligible to participate in the Gantos, Inc. Executive Bonus
Plan, beginning with the 1999 plan, if any, when adopted. A copy of the 1998
plan is enclosed. If the 1999 plan is the same as the 1998 plan, your 1999
bonus will be based on the Company's profitability, with 50% of your bonus to
be automatically earned and payable upon the achievement of earnings in
excess of the target and to be automatically allocated to the participants
based on the 1999 Gantos base salary actually paid to them. The Compensation
Committee will determine, in its discretion, what portion, if any, of the
remaining bonus pool would be paid to you.
4. On the Start Date, you will be granted an option to purchase 5,000
Gantos, Inc. common shares at an exercise price equal to the fair market
value of Gantos, Inc. common shares on the Start Date. The option will vest
in one-fifth (1/5) cumulative annual installments, beginning on the first
anniversary of the Start Date. Thereafter, you will be eligible for annual
stock option grants in amounts commensurate with your position with the
Company at the discretion of the Board of Directors or its Compensation
Committee.
5. You will receive six (6) months separation pay as your exclusive
severance benefits in the event that your employment is terminated without
cause (and other than pursuant to your death or disability) within the first
twenty-four (24) months of your employment under this Agreement. As a
condition of your receipt of severance pursuant to this agreement, after any
termination you must (a) use your best efforts to seek and obtain new
employment, and (b) advise the Company,
<PAGE>
on a timely and regular basis, of the status of your efforts, of the terms of
any employment (including self-employment), and of any remuneration you
receive from such employment. If at any time the Company, in good faith,
determines that you are not so seeking such employment, your right to receive
severance benefits will be immediately terminated. The severance benefits to
which you would otherwise be entitled will be reduced by the remuneration
that is paid or payable to you (whether as salary, bonus, commissions,
consulting fees, compensation and dividends from any entity owned by you or a
sole proprietorship established by you or otherwise) from rendering any
services to any person, corporation or entity during the period that you are
eligible to receive severance benefits under this agreement. Payment on
account of death or disability or for termination without cause after the
first twenty-four (24) months of employment under this Agreement will be in
accordance with the Company policies concerning these areas. You will be
entitled to no severance benefits if you terminate your employment with the
Company.
6. You will receive such benefits as the Company provides its other Vice
Presidents. Currently the Company provides (i) a non-contributory group life
insurance policy in the amount of one times your annual base compensation,
(ii) an individual disability policy which provides benefits equal to 60% of
your salary, (iii) a 30% discount on all merchandise purchases at our regular
price stores, (iv) medical prescription coverage under our plan on the first
day of the month following two months of employment, (v) on the first day of
the month after two months of employment, dental coverage under our plan, and
(vi) four weeks vacation a year. Enclosed is a complete breakdown of our
benefit plans for your information and review.
7. Your employment will be at will and may be terminated by either of us,
with or without cause, reason or notice. Upon such a termination, as your
exclusive severance benefits, you will be entitled to your salary through the
termination date and amounts, if any, payable to you or your estate as
described in paragraph 5 above, if such termination is without cause and
occurs within the first twenty-four (24) months of your employment under this
Agreement, or amounts payable under any Company policies then applicable to
you if such termination is on account of death or disability, on account of
termination for cause, or on account of termination without cause after the
first twenty-four (24) months of your employment under this Agreement, and,
in either case, no other payment.
8. You will comply with, and be bound by, all Company policies, procedures and
guidelines, as they may be amended and supplemented from time to time during
your employment with the Company.
Please date, sign and return the enclosed copy of this letter to indicate
your acceptance of employment on these terms.
If I can be of assistance in answering any questions that you may have,
please don't hesitate to contact my office.
Very truly yours,
GANTOS, INC.
By:
Arlene H. Stern
Its: President
Accepted and agreed on March 16, 1999
Joseph Kuhn
<PAGE>
EXHIBIT 10.3
GANTOS
March 29, 1999
Ms. Diane Abbate-Fox
1266 East Main Street, 5th Floor
Stamford, Connecticut 06902
Dear Diane:
We are very pleased to offer you the position of Vice President, General
Merchandise Manager for Gantos, Inc. (the "Company"). We are very excited to
invite you to join our senior management team. The terms of our offer
supersede any of our prior discussions and agreements, and are as follows:
1. Your initial annual salary will be $160,000.
2. Your date of employment in this position will begin on March 29, 1999
("Start Date").
3. You will be eligible to participate in the Gantos, Inc. Executive Bonus
Plan, beginning with the 1999 plan, if any, when adopted. A copy of the 1998
plan is enclosed. If the 1999 plan is the same as the 1998 plan, your 1999
bonus will be based on the Company's profitability, with 50% of your bonus to be
automatically earned and payable upon the achievement of earnings in excess of
the target and to be automatically allocated to the participants based on the
1999 Gantos base salary actually paid to them. The Compensation Committee will
determine, in its discretion, what portion, if any, of the remaining bonus pool
would be paid to you.
4. On March 16, 1999, you were granted an option to purchase 7,500 Gantos,
Inc. common shares at an exercise price equal to the fair market value of
Gantos, Inc. common shares on March 16, 1999. The option will vest in one-fifth
(1/5) cumulative annual installments, beginning on March 16, 2000. Thereafter,
you will be eligible for annual stock option grants in amounts commensurate with
your position with the Company at the discretion of the Board of Directors or
its Compensation Committee.
5. You will receive six (6) months separation pay as your exclusive severance
benefits in the event that your employment is terminated without cause (and
other than pursuant to your death or disability) within the first twenty-four
(24) months of your employment under this Agreement. As a condition of your
receipt of severance pursuant to this agreement, after any termination you must
(a) use your best efforts to seek and obtain new employment, and (b) advise the
Company, on a timely and regular basis, of the status of your efforts, of the
terms of any employment (including self-employment), and of any remuneration you
receive from such employment. If at any time the Company, in good faith,
determines that you are not so seeking such employment, your right to receive
severance benefits will be immediately terminated. The severance benefits to
which you would otherwise be entitled will be reduced by the remuneration that
is paid or payable to you (whether as salary, bonus, commissions, consulting
fees, compensation and dividends from any entity owned by you or a sole
proprietorship established by you or otherwise) from rendering any services to
any person, corporation or entity during the period that you are eligible to
receive severance benefits under this agreement. Payment on account of death or
<PAGE>
disability or for termination without cause after the first twenty-four (24)
months of employment under this Agreement will be in accordance with the Company
policies concerning these areas. You will be entitled to no severance benefits
if you terminate your employment with the Company.
6. You will receive such benefits as the Company provides its other Vice
Presidents. Currently the Company provides (i) a non-contributory group life
insurance policy in the amount of one times your annual base compensation,
(ii) an individual disability policy which provides benefits equal to 60% of
your salary, (iii) a 30% discount on all merchandise purchases at our regular
price stores, (iv) medical prescription coverage under our plan on the first
day of the month following two months of employment, (v) on the first day of
the month after two months of employment, dental coverage under our plan, and
(vi) four weeks vacation a year. Enclosed is a complete breakdown of our
benefit plans for your information and review.
7. Your employment will be at will and may be terminated by either of us,
with or without cause, reason or notice. Upon such a termination, as your
exclusive severance benefits, you will be entitled to your salary through the
termination date and amounts, if any, payable to you or your estate as
described in paragraph 5 above, if such termination is without cause and
occurs within the first twenty-four (24) months of your employment under this
Agreement, or amounts payable under any Company policies then applicable to
you if such termination is on account of death or disability, on account of
termination for cause, or on account of termination without cause after the
first twenty-four (24) months of your employment under this Agreement, and,
in either case, no other payment.
8. You will comply with, and be bound by, all Company policies, procedures and
guidelines, as they may be amended and supplemented from time to time during
your employment with the Company.
Please date, sign and return the enclosed copy of this letter to indicate
your acceptance of employment on these terms.
If I can be of assistance in answering any questions that you may have,
please don't hesitate to contact my office.
Very truly yours,
GANTOS, INC.
By:
Arlene H. Stern
Its: President
Accepted and agreed on March 29, 1999
Diane Abbate-Fox
<PAGE>
EXHIBIT 10.4
GANTOS, INC.
1266 EAST MAIN STREET, 5TH FLOOR
STAMFORD, CONNECTICUT 06902
March 16, 1999
Mr. Dennis Horstman
1266 East Main Street, 5th Floor
Stamford, Connecticut 06902
Dear Dennis:
We have entered into a letter agreement, dated November 1, 1996 (the
"Agreement"), with respect to your employment with Gantos, Inc. ("Gantos"). In
connection with your continued employment by Gantos, you and Gantos desire to
extend the severance provisions of the Agreement by two years. This letter (the
"Amendment") states our agreement with respect to the changes to the Agreement
and is entered into in exchange for good and valuable consideration, the receipt
and adequacy of which are acknowledged by both of us.
1. SEVERANCE. The Agreement is amended by substituting the following for
the first and second to last sentences of Paragraph 5 of the Agreement:
"You will receive twelve (12) months separation pay as your exclusive
severance benefits in the event that your employment is terminated without
cause (and other than pursuant to your death or disability) on or before
December 2, 2000."
"Payment on account of death or disability or for termination without cause
after December 2, 2000 will be in accordance with the Company's policies
concerning these areas."
2. NO OTHER CHANGE. Except as modified by this Amendment, the Agreement
shall continue in full force according to its terms and is ratified.
3. COUNTERPARTS. This Amendment may be signed in counterparts, both of
which together will be deemed an original of this Amendment. This Amendment
will also be effective if evidenced by signed copies transmitted by telecopier
or facsimile transmission.
If this letter correctly expresses our mutual understanding, please sign
and date the enclosed copy and return it to us.
Very truly yours,
GANTOS, INC.
By:
Its:
The terms of this agreement
are accepted and agreed to
on ____________________:
Dennis Horstman
<PAGE>
EXHIBIT 10.5
GANTOS, INC.
1266 EAST MAIN STREET, 5TH FLOOR
STAMFORD, CONNECTICUT 06902
March 16, 1999
Ms. Arlene H. Stern
1266 East Main Street, 5th Floor
Stamford, Connecticut 06902
Dear Arlene:
We have entered into a letter agreement, dated June 20, 1996 (the
"Agreement"), as amended by the Termination Agreement, dated as of May 12,
1998 (the "Termination Agreement"), and the letter agreement, dated May 19,
1998 (the "First Amendment"), with respect to your employment with Gantos,
Inc. ("Gantos"). In connection with your continued employment by Gantos, you
and Gantos desire to (i) extend for one year the term and minimum bonus
provisions of the Agreement, (ii) reduce the threshold for a change in
control involving a merger, consolidation, reorganization or share exchange
from 50% to 40%, and (iii) terminate the Termination Agreement. This letter
(the "Second Amendment") states our agreement with respect to the changes to
the Agreement and is entered into in exchange for good and valuable
consideration, the receipt and adequacy of which are acknowledged by both of
us.
1. TERM. The Agreement, as amended, is further amended by substituting
the phrase "four years" for the phrase "three years" in the introductory
paragraph of Paragraph 2 of the Agreement.
2. MINIMUM BONUS. The Agreement, as amended, is further amended by
substituting the following for Paragraph 3(d) of the Agreement:
"(d) If you are employed by Gantos at the end of the applicable fiscal
year, you will receive a minimum bonus of $75,000 with respect to each of
fiscal 1996, 1998 and 1999. Therefore, if you are employed by Gantos at
the end of the applicable fiscal year, with respect to each of fiscal 1996,
1998 and 1999, Gantos will pay to you the excess, if any, of $75,000 over
the amount paid or payable to you pursuant to Paragraph 3.(b) and
Paragraph 3.(c). Conversely, if the amount paid or payable to you pursuant
to Paragraph 3.(b) and Paragraph 3.(c) is at least $75,000, no payment will
be made under this Paragraph 3.(d) with respect to that fiscal year."
<PAGE>
3. CHANGE IN CONTROL. The Agreement, as amended, is further amended by
substituting the figure "40%" for the figure "50%" in the two places it appears
in Paragraph 6(f)(iii)(2) of the Agreement.
4. TERMINATION AGREEMENT. The Agreement, as amended, is further amended
by terminating the Termination Agreement and treating it as if it had never
existed.
5. NO OTHER CHANGE. Except as modified by this Second Amendment, the
Agreement, as amended, shall continue in full force according to its terms and
is ratified.
6. COUNTERPARTS. This Second Amendment may be signed in counterparts,
both of which together will be deemed an original of this Second Amendment.
This Second Amendment will also be effective if evidenced by signed copies
transmitted by telecopier or facsimile transmission.
If this letter correctly expresses our mutual understanding, please sign
and date the enclosed copy and return it to us.
Very truly yours,
GANTOS, INC.
By:
Its:
The terms of this agreement
are accepted and agreed to
on ____________________:
Arlene H. Stern
<PAGE>
EXHIBIT 10.10
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "FIRST
AMENDMENT") is made and entered into as of February __, 1999, by and among
Gantos, Inc., a corporation formed under the laws of the State of Michigan
(the "BORROWER"), and Foothill Capital Corporation, as Agent ("FOOTHILL") and
the financial institutions listed on the signature page of the Loan Agreement
referred to below (such financial institutions, together with their
respective successors and assigns, are collectively referred to herein as the
"LENDERS"). This First Amendment amends certain provisions of that certain
Loan and Security Agreement dated as of November 18, 1998 by and among the
Borrower and Foothill, as Agent, and the Lenders (as amended by and through
the date of this First Amendment, and as hereafter amended and/or restated
from time to time, the "LOAN AGREEMENT"). Capitalized terms used herein and
not otherwise defined shall have the same meanings herein as in the Loan
Agreement.
BACKGROUND
In accordance with the Loan Agreement, the Borrower, Foothill and the
Lenders have agreed to amend the Loan Agreement by, among other things,
amending, or adding, thereto certain financial covenants and retail
performance covenants and establishing the dates upon which such covenants
will be tested under the Loan Agreement, and amending certain other
provisions of the Loan Agreement, in each instance subject to the terms and
conditions set forth below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the Agent and the
Lenders hereby agree as follows:
1. AMENDMENTS TO LOAN AGREEMENT.
(a) AMENDMENT TO SUBSECTION 1.1. Subsection 1.1 of the Loan Agreement is
hereby amended by adding the following definition alphabetically therein:
"NET WORTH" means, as of any date of determination, Borrower's total
shareholder's equity."
(b) AMENDMENT TO SUBSECTION 7.20. Subsection 7.20 of the Loan Agreement
is hereby amended by deleting such existing subsection in its entirety and
inserting in lieu thereof the following:
A7.20 FINANCIAL COVENANTS
(a) MINIMUM NET WORTH. Permit its Net Worth as of the last day
of any month indicated below to be less than the corresponding amount
indicated for such month:
<PAGE>
<TABLE>
<CAPTION>
MONTH MINIMUM NET WORTH
----- -----------------
<S> <C>
January, 1999 $9,000,000
February, 1999 $7,400,000
March, 1999 $7,900,000
April, 1999 $8,400,000
May, 1999 $7,400,000
June, 1999 $5,900,000
July, 1999 $4,000,000
August, 1999 $2,300,000
September, 1999 $3,400,000
October, 1999 $2,800,000
November, 1999 $3,200,000
December, 1999 $5,500,000
January, 2000 and
each subsequent calendar
month during the term
of this Agreement $2,500,000
</TABLE>
(b) MINIMUM EBITDA - ROLLING TWELVE MONTH PERIODS. Permit its
EBITDA for the period of the trailing twelve (12) consecutive months ending
on each date indicated below to be less than the amount indicated for such
period:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDING MINIMUM EBITDA
-------------------- ---------------
<S> <C>
February 28, 1999 ($2,650,000)
March 31, 1999 ($2,500,000)
April 30, 1999 ($2,950,000)
May 31, 1999 ($2,850,000)
June 30, 1999 ($2,400,000)
</TABLE>
(c) MINIMUM EBITDA - ROLLING SIX MONTH PERIODS. Permit its EBITDA
for the period of the trailing six (6) consecutive months ending on each date
indicated below to be less than the amount indicated for such period:
<TABLE>
<CAPTION>
SIX MONTHS ENDING MINIMUM EBITDA
----------------- --------------
<S> <C>
July 31, 1999 ($1,700,000)
August 31, 1999 ($1,900,000)
September 30, 1999 ($1,450,000)
October 31, 1999 ($2,900,000)
November 30, 1999 ($1,400,000)
December 31, 1999 $2,700,000
January 31, 2000 and the last day
of each subsequent calendar
month during the term
of this Agreement $1,400,000"
</TABLE>
2
<PAGE>
(c) AMENDMENT TO SUBSECTION 7.21. Subsection 7.21 of the Loan Agreement
is hereby amended by adding the following sentences to the end of such
existing subsection:
"Notwithstanding anything to the contrary contained in this Agreement:
(a) the Borrower's compliance with the covenants set forth on SCHEDULE 7.21
shall be tested for the first time on the respective dates indicated on such
Schedule; (b) any failure of the Borrower to comply with such covenants on
or after such dates shall not be a Default or Event of Default hereunder.
Nothing in the preceding sentence shall limit or impair Agent's rights under
Section 2.1 of this Agreement, including, without limitation, the Agent's
right to create additional reserves against the Borrowing Base or reduce its
advance rates against Eligible Inventory as determined in accordance with
SCHEDULE 7.21 based on the Borrower's noncompliance with the covenants set
forth therein."
(d) AMENDMENTS TO SCHEDULE 7.21 AND EXHIBIT B-1. The Loan Agreement is
hereby amended by deleting in their entireties the existing SCHEDULE 7.21 and
EXHIBIT B-2 thereto and substituting therefor the forms of SCHEDULE 7.21 and
EXHIBIT B-2 attached to this First Amendment.
2. REPRESENTATIONS AND WARRANTIES; CONFIRMATION OF REPRESENTATIONS,
WARRANTIES.
This First Amendment has been duly authorized, executed and delivered by
the Borrower. The Loan Agreement, as amended hereby, and each of the other
Loan Documents, as amended by and through the date hereof, constitute legal,
valid and binding obligations of the Borrower, enforceable against the
Borrower in accordance with their respective terms. The Borrower, by
execution of this First Amendment, certifies to the Agent and each of the
Lenders that each of the representations and warranties set forth in the Loan
Agreement and the other Loan Documents is true and correct as of the date
hereof, except to the extent such representations and warranties expressly
relate to an earlier date, as if fully set forth in this First Amendment, and
that, as of the date hereof, no Default or Event of Default has occurred and
is continuing under the Loan Agreement or any other Loan Document. The
Borrower acknowledges and agrees that this First Amendment shall become a
part of the Loan Agreement and shall be a Loan Document.
3. CONDITIONS PRECEDENT.
Prior to or concurrently with the execution by the Agent and the Lenders
of this First Amendment, and as a condition to the obligation of the Lenders
to execute this First Amendment and make Advances for the account of the
Borrower on and after the date hereof:
(a) This First Amendment and all other agreements, instruments and
certificates reasonably required by the Lenders in connection herewith and
therewith, shall have been executed and delivered by each of the parties
thereto; and
3
<PAGE>
(b) The Borrower shall have delivered or caused to be delivered to the
Agent such other instruments, certificates or documents as the Agent or any
Lender shall reasonably request, each of which shall be in form and substance
satisfactory to the Agent and the Lenders, for the purposes of implementing
or effectuating the provisions of the Loan Agreement and the other Loan
Documents, each as amended hereby; and
(c) The Borrower shall have delivered to the Agent a pro-forma covenant
compliance certificate demonstrating the Borrower's ongoing compliance with
the covenants set forth in the Loan Agreement, as amended hereby.
4. CONDITIONS TO LENDING; COMPLIANCE WITH LOAN DOCUMENTS, ETC.
The Borrower hereby represents and warrants to the Agent and the Lenders
that all of the conditions precedent to lending specified in Section 3.2 of
the Loan Agreement have been and continue to be satisfied as of the date
hereof. Without limiting the generality of the foregoing, the Borrower
hereby confirms that it is in compliance with all of the terms and provisions
set forth in the Loan Agreement and each of the other Loan Documents, as
amended hereby, on its part to be observed or performed on or prior to the
date hereof.
5. NO NOVATION; EFFECT; COUNTERPARTS; GOVERNING LAW.
Except to the extent specifically amended hereby, the Loan Agreement and
each of the other Loan Documents shall be unaffected hereby and shall remain
in full force and effect; this First Amendment shall not be deemed a
novation of the Loan Agreement or any other Loan Document. The Borrower
hereby acknowledges, confirms and ratifies its obligations under the Loan
Agreement and each of the other Loan Documents. This First Amendment may be
executed in any number of counterparts, and by the different parties on
separate counterparts, each of which, when so executed and delivered, shall
be an original, but all the counterparts shall together constitute one
instrument. This First Amendment shall be governed by the internal laws of
The Commonwealth of Massachusetts (without reference to conflicts of law
principles) and shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. The Borrower
shall pay all reasonable out-of-pocket expenses of the Agent and the Lenders
in connection with the preparation, execution and delivery of this First
Amendment.
6. CONSTRUCTION.
The Borrower, by execution hereof, acknowledges and confirms that for all
purposes of the Loan Agreement and the other Loan Documents, the term "Loan
Agreement" shall mean the Loan Agreement as amended by and through the date
of this First Amendment and as further amended and/or restated from time to
time hereafter.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
to Loan and Security Agreement as a sealed instrument as of the date first
above written.
GANTOS, INC.
By:________________________________
Name:______________________________
Title:_____________________________
FOOTHILL CAPITAL CORPORATION, for itself
and as Agent for the Lenders
By: ________________________________
(Title)
PARAGON CAPITAL, LLC, as a Lender
By: ________________________________
(Title)
5
<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) and in the
Registration Statement on Form S-3 (No. 333-68545) of Gantos, Inc. of our
report dated April 13, 1999, relating to the financial statements and the
financial statement schedule appearing on page F-2 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Battle Creek, Michigan
April 30, 1999
<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 TWELVE-MONTH PERIOD
ENDED, JANUARY 30, 1999 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> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 1,275
<SECURITIES> 0
<RECEIVABLES> 18,211
<ALLOWANCES> 577
<INVENTORY> 27,808
<CURRENT-ASSETS> 54,770
<PP&E> 63,191
<DEPRECIATION> 52,229
<TOTAL-ASSETS> 66,653
<CURRENT-LIABILITIES> 19,681
<BONDS> 37,651
0
0
<COMMON> 78
<OTHER-SE> 9,243
<TOTAL-LIABILITY-AND-EQUITY> 66,653
<SALES> 149,625
<TOTAL-REVENUES> 149,625
<CGS> 124,833
<TOTAL-COSTS> 124,833
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,791
<INCOME-PRETAX> (12,597)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,597)
<DISCONTINUED> 0
<EXTRAORDINARY> (220)
<CHANGES> 0
<NET-INCOME> (12,817)
<EPS-PRIMARY> (1.68)
<EPS-DILUTED> (1.68)
</TABLE>
