<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934.
For the quarterly period ended October 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)
Michigan 38-1414122
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1266 E. Main Street, Fifth Floor, Stamford, Connecticut 06902
---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 358-0294
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----- -----
Number of common shares outstanding at December 6, 1999: 2,709,963
<PAGE> 2
GANTOS, INC.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Statements of Operations 3
Balance Sheets 4
Statements of Cash Flows 5
Notes to Financial Statements 6-10
Management's Discussion and Analysis of
Results of Operations and Financial Condition 11-18
Quantitative and Qualitative Disclosures
about Market Risk 18
PART II. OTHER INFORMATION
Changes in Securities and Use of Proceeds 19
Defaults Upon Senior Securities 19-20
Exhibits and Reports on Form 8-K 20-21
Signatures 22
</TABLE>
Page 2 of 22 pages
<PAGE> 3
GANTOS, INC.
STATEMENTS OF OPERATIONS
(Amounts in thousands, except share, per share and store data)
(unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
-------------------------- --------------------------
Oct. 30, Oct. 31, Oct. 30, Oct. 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 33,560 $ 35,446 $ 107,284 $ 106,267
Cost of sales (including buying,
distribution and occupancy costs) $ (28,235) $ (29,215) $ (88,265) $ (88,503)
----------- ----------- ----------- -----------
Gross income $ 5,325 $ 6,231 $ 19,019 $ 17,764
Selling, general and administrative
expense $ (9,489) $ (8,672) $ (27,203) $ (26,310)
Merger termination expense $ (784) $ (784)
Finance charge and other revenue $ 1,196 $ 996 $ 3,284 $ 3,128
----------- ----------- ----------- -----------
Operating loss $ (2,968) $ (2,229) $ (4,900) $ (6,202)
Interest expense $ (1,488) $ (1,788) $ (3,994) $ (3,512)
----------- ----------- ----------- -----------
Loss before income taxes $ (4,456) $ (4,017) $ (8,894) $ (9,714)
Income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (4,456) $ (4,017) $ (8,894) $ (9,714)
=========== =========== =========== ===========
Per share amounts:
Net loss per share (basic and diluted) $ (1.64) $ (1.57) $ (3.35) $ (3.82)
=========== =========== =========== ===========
Weighted average shares outstanding (basic and diluted) 2,709,266 2,554,073 2,653,099 2,543,545
=========== =========== =========== ===========
Stores open at end of period 116 115 116 115
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
Page 3 of 22 pages
<PAGE> 4
GANTOS, INC.
BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Oct. 30, Jan. 30, Oct. 31,
1999 1999 1998
ASSETS (unaudited) (unaudited)
- ------ ----------- -------- -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,179 $ 1,275 $ 1,175
Accounts receivable, less
allowance for doubtful accounts
of $599, $577 and $517 at
October 30, 1999, January 30, 1999
and October 31, 1998, respectively 16,307 17,634 16,829
Merchandise inventories 36,988 27,808 38,026
Prepaid expenses and other 10,263 8,053 12,181
-------- -------- --------
Total current assets 64,737 54,770 68,211
-------- -------- --------
Property and equipment, at cost:
Leasehold improvements 31,805 31,290 31,119
Furniture and fixtures 32,093 31,813 31,752
Other 433 88 716
-------- -------- --------
Total property and equipment 64,331 63,191 63,587
Less - Accumulated depreciation
and amortization (54,898) (52,229) (51,233)
-------- -------- --------
Net property and equipment 9,432 10,962 12,354
Other assets 771 921 -
-------- -------- --------
Total assets $ 75,940 $ 66,653 $ 80,565
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,243 $ 12,189 $ 20,859
Accrued expenses and other 6,685 7,492 7,188
Reclassified long-term debt (see note 4) 40,277 37,651 40,365
-------- -------- --------
Total current liabilities 74,205 57,332 68,412
Shareholders' equity:
Preferred stock, $.01 par value, 2,000,000
shares authorized; none issued
Common stock, $.01 par value, 20,000,000
shares authorized; approximately 2,710,000
issued and outstanding at October 30, 1999,
2,607,000 issued and outstanding at
January 30, 1999 and 2,557,000 issued and
outstanding at October 31, 1998 27 26 26
Additional paid-in capital 41,790 41,485 41,485
Accumulated deficit (41,082) (32,190) (29,086)
-------- -------- --------
Total shareholders' equity 735 9,321 12,153
-------- -------- --------
Total liabilities and shareholders' equity $ 74,940 $ 66,653 $ 80,565
======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements
Page 4 of 22 pages
<PAGE> 5
GANTOS, INC.
STATEMENTS OF CASH FLOWS
(Thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
-------------------------
Oct. 30, Oct. 31,
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss (8,894) (9,714)
Adjustments to reconcile net loss to
net cash used by operating activities:
Cash used for facilities closings -
Depreciation and amortization 2,521 3,116
Restricted stock compensation expense - 40
Other 150
Changes in assets and liabilities:
Accounts receivable 1,327 1,778
Merchandise inventories (9,180) (15,486)
Prepaid expenses and other (2,210) (3,976)
Accounts payable 15,054 13,215
Accrued expenses and other (808) (1,284)
--------- ---------
Total adjustments 6,856 (2,597)
--------- ---------
Net cash used by operating activities (2,038) (12,311)
--------- ---------
Cash flows from investing activities:
Capital expenditures (1,140) (924)
--------- ---------
Net cash flows used by investing activities (1,140) (924)
--------- ---------
Cash flows from financing activities:
Principal payments under capital lease
obligations and other long-term debt (1,876) (1,578)
Issuance of common shares 307 174
Borrowings under revolving credit notes payable 126,868 126,633
Repayments under revolving credit notes payable (122,367) (112,088)
Other 150 (27)
--------- ---------
Net cash provided by financing activities 3,082 13,115
--------- ---------
Net increase (decrease) in cash and cash equivalents (96) (120)
Cash and cash equivalents at beginning of period 1,275 1,295
--------- ---------
Cash and cash equivalents at end of period 1,179 1,175
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 3,752 $ 2,480
</TABLE>
See accompanying notes to condensed financial statements.
Page 5 of 22 pages
<PAGE> 6
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS
1. The interim financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented not
misleading. Nevertheless, it is recommended that these financial
statements are read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended January 30, 1999.
The accompanying interim financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of
the results of the interim periods presented and necessary to present
fairly the financial position as of October 30, 1999, January 30, 1999 and
October 31, 1998 and the results of operations for the thirteen and
thirty-nine weeks, and cash flows for the thirty-nine weeks, ended October
30, 1999 and October 31, 1998. Effective July 21, 1999, the Company
affected a one-for-three reverse stock split. The financial statements
have been restated to give retroactive effect to this reverse stock split.
All other adjustments are of a normal and recurring nature.
The results of operations for the thirteen-week and thirty-nine week
periods ended October 30, 1999 and October 31, 1998 are not necessarily
indicative of the results to be expected for the full year due to the
seasonal nature of the business.
2. Inventories are stated at the lower of cost or market and consists
primarily of finished goods.
3. Basic net loss per share is determined by dividing net loss by the
weighted average number of common shares outstanding during the period
presented.
Diluted loss per share data has not been presented because its effect is
anti-dilutive.
4. Long-Term Debt
As of August 27, 1999, the Company amended its Loan and Security Agreement
with Foothill Capital Corporation and Paragon Capital LLC (the
"Foothill/Paragon Facility") to (1) increase the borrowing base by $1.5
million through September 30, 1999, (2) add an additional retail covenant
regarding weekly purchases, (3) raise the service fee required if special
advances are obtained to $12,000 a month, and (4) require the Company to
prepare a weekly cash flow projection through March 31, 2000. The Company
paid the lenders a $20,000 fee in connection with this amendment. As of
October 1, 1999, the Company entered into a letter agreement with the
lenders under the Foothill/Paragon Facility to extend the increase in
borrowing base through October 26, 1999. The Company agreed to pay the
lenders a $10,000 fee in connection with this amendment and to provide
revised weekly cash flow projections for the period from December 1, 1999
through February 28, 2000.
As of November 8, 1999 the Company entered into another letter agreement
with the lenders under the Foothill/Paragon Facility to extend the
increase in borrowing base through November 30, 1999, but reducing the
increase to $500,000 beginning November 16, 1999. The Company agreed to
pay the lenders a $10,000 fee in connection with this amendment and
acknowledged that it had failed to meet certain sales covenants. The
lenders agreed to waive the defaults based on the Company's agreement
among others: (1) the parties agreed to eliminate the "LCM Accrual",
previously added to the borrowing base, over time, reducing it be $250,000
in each of December and January,
Page 6 of 22 pages
<PAGE> 7
and then $100,000 a month until it equals the LCM Accrual.
On December 1, 1999, the lenders under the Foothill/Paragon Facility
notified the Company (i) of further defaults under the Foothill/Paragon
Facility and (2) that any further advances under the Foothill/Paragon
Facility would only be made in the lenders' discretion. If the agreement
is terminated and (3) that the lenders were reserving all of their rights
to enforce the Foothill/Paragon Facility. Those rights include declaring
the entire indebtedness due, not extending any further credit, terminating
the agreement and requiring the Company to hold its inventories in trust
for the lenders. If the agreement is terminated.
As of December 9, 1999, the Company and the lenders under the
Foothill/Paragon Facility entered into a letter agreement pursuant to
which the Company (i) acknowledged that it was in default under certain
covenants set forth in the facility, including the failure to meet certain
sales and purchase covenants, and the failure to deliver timely financial
statements to the lenders for the month of November, and (2) the Company
agreed that any advances under the facility in December 1999 would be
subject to the provisions of the loan agreement, including advance rates
and borrowing base limitations and would be limited to the amounts
necessary to fund the disbursements set forth in a December cash budget.
The Company also agreed, among others, to provide the lenders with certain
additional information to allow the lenders to monitor the Company more
closely, to commence "all items on sale" promotional sales at certain of
its stores and to retain consultants to advise the Company or certain
financial makers.
Without waiving their reservation of rights, the Company acknowledged that
the lenders have informed the Company that they intend to continue making
advances and exercise their rights and remedies under the loan documents
if (1) the Company fails to make any required payment to the lenders, (2)
the Company fails to comply with the December cash in any category
measured daily budget, (3) the Company makes any misrepresentation in any
document or fails to perform any covenant in the letter agreement, (4) the
Company becomes insolvent or a bankruptcy case or proceeding is commenced
against the Company, (5) the lenders believe an event of condition has
occurred that could cause a material adverse change in the Company, or (6)
any Event of Default occurs under the loan documents.
The Company has violated other requirements of its loan agreement relating
to failure to maintain minimum levels of net worth and earnings before
interest, taxes, depreciation and amortization and failure to comply with
retail performance covenants regarding purchases, inventories and sales.
The Company is unlikely to be able to comply with these covenants in the
future unless its sales and trade credit substantially improve and it
receives a capital infusion, or the covenants are changed. As of December
13, 1999, the Company had $35.8 million in borrowings and $0.7 million in
letters of credit outstanding under the Foothill/Paragon Facility and $1.5
million was available for borrowing under the Foothill/Paragon Facility.
The lenders under the Foothill/Paragon Facility
Page 7 of 22 pages
<PAGE> 8
continue, in their discretion, to allow the Company to borrow under the
facility to the extent of the borrowing base under the facility, but have
not waived current defaults or changed the covenants. They may discontinue
advances at any time. If the lenders under the Foothill/Paragon Facility
exercise their right to cease making advances, the Company would not be
able to continue to operate. If the agreement is terminated before
November 18, 2000, the Company will owe the lenders an $800,000
termination fee.
As of April 30, 1999, holders of approximately 96% in principal amount of
the Company's 12.75% Notes issued under the Indenture, dated as of April
1, 1995, as amended (the "Indenture") agreed to reschedule their portion
of the principal payments on the Notes outstanding under the Indenture.
For holders of the remaining 4% in principal amount of notes, the payment
schedule remains unaffected. As of July 1, 1999, the Company and the
Trustee under the Indenture amended the Indenture to reflect the new
payment schedule. For the rescheduled holders the payment schedule is as
follows:
<TABLE>
<CAPTION>
Date Amount Date Amount
---------------- ------------- ------------- -------------
<S> <C> <C> <C>
5/1/99 $223,874 10/1/00 $335,811
7/1/99 $223,874 1/1/01 $746,246
10/1/99 $223,874 4/1/01 $671,621
1/1/00 $671,621 7/1/01 $444,577
4/1/00 $671,621
7/1/00 $335,811
</TABLE>
In exchange for such amendment to the payment schedule, the Company issued
to the affected holders five-year warrants to purchase 475,000 of the
Company's Common Shares at an exercise price of $0.01 per share. The
Company has agreed to issue shares without transfer restrictions upon
exercise of the warrants. All stock warrants issued under this arrangement
were immediately vested and have a term of five years. The fair value of
stock warrants issued, approximately $400,000, was capitalized as accrued
expenses and is being charged to interest expense over the remaining term
of the Notes using the interest method.
The Company's defaults under the Foothill/Paragon Facility also result in
a default under the Indenture. If the Company's obligations under the
Foothill/Paragon Facility are accelerated, the Company's obligations under
the Indenture will also be accelerated. In addition, the Company has
violated the Indenture covenant requiring it to maintain at least $4.5
million of net worth at the end of each fiscal quarter through the third
quarter of 2000. In addition, if the net worth covenant violation becomes
an event of default and continues, the trustee or the Note holders may
accelerate the obligations under the Indenture. Also, the Company does not
believe that it will have sufficient cash to make the January 1, 2000
sinking fund payment required under the Indenture. The Company is
negotiating with the holders of a majority in principal amount of the
Notes under the Indenture to waive the defaults or convert the Notes into
equity or convertible subordinated indebtedness. In addition, the
Company's current net worth does not meet the requirement for continued
listing of the Company's common shares on The Nasdaq SmallCap market and
will likely result in the delisting of the common shares. Any such
delisting would likely lessen the Note holders' willingness to convert the
Notes under the Indenture into equity or convertible indebtedness.
As a result of the defaults under the Foothill/Paragon Facility and the
Indenture, the indebtedness under the Foothill/Paragon Facility and the
Indenture have been reclassified on the Company's balance sheet as
short-term obligations.
Page 8 of 22 pages
<PAGE> 9
The Company frequently has not been able to make timely payments to its
trade creditors, factors and other creditors. As of December 13, 1999, the
Company had past dues payables in the amount of $10.1 million. The Company
had made cash deposits with factors to obtain trade credit, but in the
forth quarter of 1999 has directed its factors to apply such cash balances
to outstanding amounts due and has attempted to negotiate trade credit
directly with manufacturers. As of December 10, 1999, the Company has
almost no trade credit. Substantially all of the Company's current
inventory purchases are being made on a cash-on-delivery basis and some
vendors have suspended deliveries to the Company. These factors have
reduced the Company's ability to make purchases, resulting in reduced
inventory in the Company's stores (approximately $3.4 million below
budgeted inventory receipts in November at cost) and reduced sales. If the
Company continues to be unable to purchase adequate inventories, it will
not be able to continue to operate.
The Company is exploring its strategic alternatives, but believes that it
will require a significant capital infusion to continue operations until
any party is ready to make a proposal for a business combination or other
strategic transaction, even if such a proposal were made in January 2000.
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 required
capital infusion would be higher. In December, the Company's sales and
trade credit have been lower than expected through December 10, 1999. In
addition, the Company is dependent on its lenders under the
Foothill/Paragon Facility and the Indenture not accelerating its required
debt payments and is dependent on continued advances under the
Foothill/Paragon Facility, both of which are in the discretion of the
lenders. There can be no assurance that the Company will be able to obtain
sufficient capital infusion at all or in a timely manner or on terms
acceptable to the Company, that its other indebtedness will not be
accelerated or that it will continue to receive advances under the
Foothill/Paragon Facility. The lenders under the Foothill/Paragon Facility
currently are not willing to provide the additional capital.
Even if the Company obtains a capital infusion, there can be no assurance
that any proposal for a strategic transaction would be made, or if one
were made that it would be on terms and conditions acceptable to the
Company or that the parties would be able to consummate such a transaction
in a timely manner. If the Company does not obtain an adequate capital
infusion and consummate an acceptable strategic transaction before the
end of December, 1999, the Company would be required to substantially
reduce or discontinue its operations, file for bankruptcy or both. The
Company has engaged an investment banker and other professionals to
explore its strategic alternatives, a financial crisis manager to help
manage its liquidity crisis and develop recommendations for restructuring
the Company, and a sales consultant to advise the Company regarding sales
strategies to maximize cash flow. There can be no assurance that any of
these activities will be successful or, even if successful, will provide
the Company with enough cash to continue operations.
5. The accompanying financial statements have been prepared on the 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 nine months ended October 30, 1999,
the Company incurred a loss of $8,105,000 and has experienced increasingly
tight or no trade credit. See also Note 4. These factors among others may
indicate that the Company will be unable to continue as a going concern.
The Company is exploring various strategic alternatives.
The financial statements do not include any adjustments relating to the
recoverability and classification of assets and liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's ability to continue as a going concern is dependent upon its
ability to obtain a capital infusion, its ability to consummate a
successful and timely strategic transaction or reorganization of its
business, its lenders under the Foothill/Paragon Facility and the
Indenture not accelerating its required debt payments and continued
advances under the Foothill/Paragon Facility, both of which are in the
discretion of the lenders, its ability to obtain merchandise, its ability
to generate sufficient cash flow to meet its obligations on a timely
basis, its ability to amend or comply with the terms of the
Foothill/Paragon Facility and the
Page 9 of 22 pages
<PAGE> 10
Indenture, support from trade creditors and factors, changes in comparable
store sales, and future profitable operations.
6. The Company closed a store in February of 1999 and opened a new, smaller
store in March of 1999 and another in October of 1999. The Company reviews
the performance of its less profitable existing stores from time to time
to determine whether it would be in the Company's best interests to close
any of these stores. Store closings could have a significant impact on the
Company's sales, expenses and capital requirements and would likely entail
additional one-time charges to effect the closing and to recognize any
impairment of assets resulting from the closing decision and any remaining
lease obligations to the landlord for the closed store.
Page 10 of 22 pages
<PAGE> 11
GANTOS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Results of Operations
Thirteen and Thirty-nine Weeks Ended October 30, 1999, Compared to Thirteen and
Thirty-nine Weeks Ended October 31, 1998.
The following table indicates the percentage relationships to net sales of
various revenue and expense items for the thirteen and thirty-nine week periods
ended October 30, 1999 and October 31, 1998.
<TABLE>
<CAPTION>
As a percent of net As a percent of net
sales for the thirteen sales for the thirty-nine
weeks ended weeks ended
---------------------- -------------------------
Oct. 30, Oct. 31, Oct. 30, Oct. 31,
1999 1998 1999 1998
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales (including buying,
distribution and occupancy costs) (84.1) (82.4) (82.3) (83.3)
----- ----- ----- -----
Gross income 15.9 17.6 17.7 16.7
Selling, general and administrative (28.3) (24.5) (25.4) (24.8)
expense
Merger termination expense -- (2.2) -- (0.7)
Finance charge and other revenue 3.6 2.8 3.1 2.9
----- ----- ----- -----
Operating loss (8.8) (6.3) (4.6) (5.8)
Interest expense (4.5) (5.0) (3.7) (3.3)
----- ----- ----- -----
Loss before income taxes (13.3) (11.3) (8.3) (9.1)
----- ----- ----- -----
Net loss (13.3) (11.3) (8.3) (9.1)
===== ===== ===== =====
</TABLE>
Net sales for the thirteen weeks ended October 30, 1999 were approximately $33.6
million, a decrease of approximately $1.9 million, or 5.3%, from net sales of
approximately $35.5 million for the same period of the prior fiscal year. Net
sales for stores in operation throughout both periods decreased 5.2%, or
approximately $1.8 million, for the third quarter of 1999 compared to the same
period in 1998. The 5.2% decrease in comparable store sales is comprised of a
4.7% decrease in unit sales combined with a 0.5% decrease in average sales
dollars per unit. October sales were affected by difficulties in obtaining
merchandise from vendors resulting from the Company's current financial
condition and the related tightening of trade credit and deteriorating
relations with vendors and factors. The Company's trade credit has worsened in
the fourth quarter (see "Liquidity and Capital
Page 11 of 22 pages
<PAGE> 12
Resources"), and, as a result, the Company's merchandise receipts were
approximately $8.3 million lower than planned in the fourth quarter and the
Company's November 1999 sales were 16% lower than its November 1998 sales. The
Company excepts these trends to continue through the fourth quarter. The Company
closed a store in February of 1999 and opened a new store in March of 1999 and
another in October of 1999.
Net sales for the thirty-nine weeks ended October 30, 1999 were approximately
$107.3 million, an increase of approximately $1.0 million, or 1.0%, compared to
net sales of approximately $106.3 million in the same period of the prior fiscal
year. Net sales for stores in operation throughout both periods increased 1.5%
for the first three quarters of 1999 compared to the same period in 1998. The
1.5% increase in comparable store sales is comprised of a 2.1% increase in
average sales dollars per unit, partially offset by a 0.6% decrease in unit
sales, partially due to difficulties in obtaining merchandise from vendors
resulting from the Company's current financial condition and the related
tightening of trade credit. The increase in average price is due to the factors
described in cost of sales below.
Cost of sales decreased approximately $1.0 million in the thirteen weeks ended
October 30, 1999 compared to the same period of the prior fiscal year. Cost of
sales, as a percent of net sales, increased to 84.1% in the thirteen weeks ended
October 30, 1999, compared to 82.4% in the same period in the prior fiscal year.
The increase in cost of sales, as a percent of net sales, for the thirteen weeks
ended October 30, 1999 is primarily due to relatively stable buying,
distribution and occupancy costs and decreased sales volume, combined with lower
collections of markdown allowances and returns to vendors costs. That increase
is partially augmented by the use of a markdown reserve in the third quarter of
1998, but not in the third quarter of 1999. The Company expects its costs of
sales to increase in the fourth quarter of 1999 because it expects to be more
promotional than in 1998.
Cost of sales decreased approximately $0.2 million in the thirty-nine weeks
ended October 30, 1999 compared to the same period of the prior fiscal year.
Cost of sales, as a percent of net sales, decreased to 82.3% in the thirty-nine
weeks ended October 30, 1999, compared to 83.3% in the same period in the prior
fiscal year. The decrease in cost of sales, as a percent of net sales, for the
thirty-nine weeks ended October 30, 1999 is primarily the result of lower net
costs of merchandise, and lower buying, and distribution costs for the period
compared to the prior fiscal year, partially offset by the use of a markdown
reserve in 1998 described in the paragraph above. Lower merchandise costs for
both the quarter and the year resulted partially from the greater use of Gantos
labeled goods purchased directly from foreign suppliers.
Selling, general and administrative (SG&A) expense for the thirteen weeks ended
October 30, 1999 increased approximately $817,000 compared to the same period in
the prior fiscal year. The increase in SG&A is largely due to increased
advertising expense, primarily due to an extra mailer in October 1999 and lower
vendor participation. The increase is also due, to a lesser extent, to increases
in repairs, property taxes, insurance, telephone, special services, bad debt,
and travel and entertainment expenses. The increases were mostly offset by
decreases in depreciation due to the age of the assets and payroll which
reflects lower administrative and store payrolls. Also offsetting increases, to
a lesser extent, were decreases in supplies and transportation. As a percent of
net sales, SG&A expense increased from 24.5% to 28.3% for the thirteen weeks
ended October 30, 1999 primarily as a result of the reductions described above.
The lower sales for the period also increased the percent comparison for the
period.
Selling, general and administrative (SG&A) expense for the thirty-nine weeks
ended October 30, 1999 increased approximately $893,000 compared to the same
period in the prior fiscal year. This increase was primarily due to increases in
advertising expenses (explained above) and increased repairs and maintenance
expenses for stores. To a lesser extent, increased bad debt, professional
services and travel and entertainment expenses contributed to the overall
increase. These increases in SG&A were partially offset by lower depreciation
and amortization due to the age of the assets and lower payrolls and the related
taxes, primarily for administrative personnel due to fewer employees. To a
lesser extent, transportation services also decreased. As a percent of net
sales, SG&A expense increased from 24.8% to 25.4% for the thirty-nine weeks
ended October 30, 1999 primarily as a result of lower sales volume and the
factors described above.
Page 12 of 22 pages
<PAGE> 13
Finance charge and other revenue increased approximately $200,000 to 3.6% of net
sales and increased approximately $156,000 to 3.1% of net sales for the thirteen
and thirty-nine weeks ended October 30, 1999, respectively, compared to the same
periods in the prior fiscal year. The increases were primarily due to
recognition of interest due on deposits with vendors and write-offs of inventory
adjustments, partially offset by decreases in late and finance charges
associated with the Gantos charge receivables. The decreases in late and finance
charges were primarily due to a lower average outstanding balance of Gantos
credit card receivables compared to the same period in the prior fiscal year.
The decrease in the receivables balances is primarily the result of a 4%
decrease in credit sales primarily as a result of lower use of the Gantos charge
card and lower sales (for the third quarter of 1999).
During the thirteen weeks ended October 31, 1998, the Company recorded a Merger
Termination Expense of approximately $784,000. During the third quarter the
Board of Directors authorized the Company to terminate its proposed merger with
HOM Holding, Inc. and Hit or Miss, Inc., pursuant to the Agreement and Plan of
Merger between them. As a result of the termination, the Company expensed the
accrued costs of the proposed merger, including financial advisor and
professional fees. No similar expense was recorded for the quarter ended October
30, 1999.
Interest expense for the thirteen weeks ended October 30, 1999 decreased
approximately $300,000 compared to the same period in the prior fiscal year. As
a percent of net sales it decreased from 5.0% to 4.5% for the thirteen weeks
ended October 30, 1999. The decrease is primarily attributable to reduced
interest expense on the Indenture Notes as a result of scheduled principal
payments, partially offset by higher debt levels under the Foothill/Paragon
Facility in the current period than under the Fleet and Foothill/Paragon
Facility last period, and the expense and fees associated with the new
Foothill/Paragon Facility and the warrants issued in connection with amendments
to, and the extension of, the Indenture Notes payment schedule. The increase in
amounts outstanding under the Foothill/Paragon Facility is primarily due to
operating losses, scheduled payments of the Indenture Notes and continued
difficulties with trade credit.
Interest expense for the thirty-nine weeks ended October 30, 1999 increased
approximately $482,000 compared to the same period in the prior fiscal year. As
a percent of net sales it increased from 3.3% to 3.7% for the thirty-nine weeks
ended October 30, 1999. The increase for the period is primarily due to higher
debt levels under the Foothill/Paragon Facility in the current period than under
the Fleet and Foothill/Paragon Facility in the same period last year. Complete
use of the Foothill/Paragon Facility results in additional charges, which were
paid at times in 1999. Also, fees and expenses incurred in connection with the
extension of the credit agreement and its replacement with the Foothill/Paragon
Facility and amendments to the Foothill/Paragon Facility are being amortized and
increased fiscal 1999 costs. Fees associated with the extension of the payment
schedule of the Indenture, and the value of warrants issued in connection with
amendments to the Indenture, are also being amortized and increased fiscal 1999
costs. The increase is partially offset by lower debt levels for the Indenture
Notes as a result of scheduled principal payments.
The Company continues to recognize valuation allowances for its net operating
loss carry forwards.
These factors resulted in a net loss of approximately $4.5 million, or $1.64 per
share, for the thirteen weeks ended October 30, 1999, compared to a net loss of
approximately $4.0 million, or $1.57 per share, in the same period of the prior
year. For the thirty-nine weeks ended October 30, 1999, the Company reported a
net loss of approximately $8.9 million, or $3.35 per share, compared to net loss
of approximately $9.7 million, or $3.82 per share, in the same period of the
prior year.
Page 13 of 22 pages
<PAGE> 14
Liquidity and Capital Resources
Net cash used by operating activities totaled $2.0 million in the first three
quarters of 1999 compared to $12.3 million in the same period a year ago. The
decrease was primarily attributable to an approximately $6.3 million smaller
increase in inventories this year, an approximately $1.8 million larger increase
in accounts payable this year, an approximately $0.3 million lower net loss this
year (net of non-cash items), an approximately $1.8 million smaller increase in
prepaid expenses this year, and an approximately $0.5 million smaller decrease
in accrued expenses this year, and an approximately $0.5 million smaller
decrease in accounts receivable this year. The smaller increase in inventories
is primarily due to the Company's difficulties in purchasing inventories and
higher beginning inventory levels in 1999 than in 1998. The greater increase in
accounts payable and the smaller decrease in accrued expenses is primarily the
result of slower payment by the Company. Prepaid expenses primarily represent
prepayments of merchandise and amounts receivable by the Company for goods
returned to vendors. These expenses increased less in 1999 than in 1998
primarily because of cash deposits given to factors in 1998 and higher beginning
levels of inventories in 1999 than in 1998 and write-offs of markdown allowances
and returns to vendors deemed uncollectable. The net decrease in cash used by
operating activities was partially offset by a lower depreciation expense due to
the age of the Company's assets. The Company expects the accounts receivable
balance to be lower for the remainder of 1999, compared to 1998, and that trade
credit will continue to tighten or not exist at least through the fourth quarter
of 1999.
Capital expenditures through the third quarter of 1999 were approximately
$1,140,000 compared to approximately $924,000 for the same period in 1998.
Capital expenditures in 1999 were primarily for remodeling three stores and
opening three stores (one was a temporary location for a sale offering only).
Net cash provided by financing activities through the third quarter of 1999 was
approximately $3.1 million, compared to approximately $13.1 million in the same
period a year ago. The decrease in cash provided is the result lower net
revolving credit borrowings ($4.5 million in 1999, compared to $14.5 million in
1998) and higher Indenture Note payments ($1.9 million in 1999, compared to $1.6
million in 1998). Higher Indenture Note payments due to the deferral of the July
1998 payment and 50% of the January 1999 payment to 1999, were partially offset
by the reduced payments resulting from the restructuring the Indenture payments
described below. The Company received $0.3 million upon exercise of warrants in
1999, compared to $0.2 million in 1998.
The Company has 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.
As of August 27, 1999, the Company amended the Foothill/Paragon Facility to (1)
increase the borrowing base by $1.5 million through September 30, 1999, (2) add
an additional retail covenant regarding weekly purchases, (3) raise the service
fee required if special advances are obtained to $12,000 a month, and (4)
require the Company to prepare a weekly cash flow projection through March 31,
2000. The Company paid the lenders a $20,000 fee in connection with this
amendment. As of October 1, 1999, the Company entered into a letter agreement
with the lenders under the Foothill/Paragon Facility to extend the increase in
borrowing base through October 26, 1999. The Company agreed to pay the lenders a
$10,000 fee in connection with this amendment and to provide revised weekly cash
flow projections for the period from December 1, 1999 through February 28, 2000.
As of November 8, 1999 the Company entered into another letter agreement with
the lenders under the Foothill/Paragon Facility to extend the increase in
borrowing base through November 30, 1999, but reducing the increase to $500,000
beginning November 16, 1999. The Company agreed to pay the lenders a $10,000 fee
in connection with this amendment and acknowledged that it had failed to meet
certain sales covenants. The lenders agreed to waive the defaults based on the
Company's agreement, among others to eliminate the "LCM Accrual", previously
added to the borrowing base, over time, reducing it by $250,000 in each of
December and January, and then $100,000 a month
Page 14 of 22 pages
<PAGE> 15
until it equals the LCM Accrual.
On December 1, 1999, the lenders under the Foothill/Paragon Facility
notified the Company (i) of further defaults under the Foothill/Paragon
Facility and (2) that any further advances under the Foothill/Paragon
Facility would only be made in the lenders' discretion and (3) that the
lenders were reserving all of their rights to enforce the Foothill/Paragon
Facility. Those rights include declaring the entire indebtedness due, not
extending any further credit, terminating the agreement and requiring the
Company to hold its inventories in trust for the lenders. If the agreement
is terminated.
As of December 9, 1999, the Company and the lenders under the
Foothill/Paragon Facility entered into a letter agreement pursuant to
which the Company (i) acknowledged that it was in default under certain
covenants set forth in the facility, including the failure to meet certain
sales and purchase covenants, and the failure to deliver timely financial
statements to the lenders for the month of November, and (2) the Company
agreed that any advances under the facility in December 1999 would be
subject to the provisions of the loan agreement, including advance rates
and borrowing base limitations and would be limited to the amounts
necessary to fund the disbursements set forth in a December cash budget.
The Company also agreed, among others, to provide the lenders with certain
additional information to allow the lenders to monitor the Company more
closely, to commence "all items on sale" promotional sales at certain of
its stores and to retain consultants to advise the Company or certain
financial makers.
Without waiving their reservation of rights, the Company acknowledged that
the lenders have informed the Company that they intend to continue making
advances and exercise their rights and remedies under the loan documents
if (1) the Company fails to make any required payment to the lenders, (2)
the Company fails to comply with the December cash budget, (3) the Company
makes any misrepresentation in any document or fails to perform any
covenant in the letter agreement, (4) the Company becomes insolvent or a
bankruptcy case or proceeding is commenced against the Company, (5) the
lenders believe an event of condition has occurred that could cause a
material adverse change in the Company, or (6) any Event of Default occurs
under the loan documents.
The Company has violated other requirements of its loan agreement relating
to failure to maintain minimum levels of net worth and earnings before
interest, taxes, depreciation and amortization and failure to comply with
retail performance covenants regarding purchases, inventories and sales.
The Company is unlikely to be able to comply with these covenants in the
future unless its sales and trade credit substantially improve and it
receives a capital infusion, or the covenants are changed. As of December
13, 1999, the Company had $35.8 million in borrowings and $0.7 million in
letters of credit outstanding under the Foothill/Paragon Facility and $1.5
million was available for borrowing under the Foothill/Paragon Facility.
The lenders under the Foothill/Paragon Facility
Page 15 of 22 pages
<PAGE> 16
continue, in their discretion, to allow the Company to borrow under the
facility to the extent of the borrowing base under the facility, but have
not waived current defaults or changed the covenants. They may discontinue
advances at any time. If the lenders under the Foothill/Paragon Facility
exercise their right to cease making advances, the Company would not be
able to continue to operate. If the agreement is terminated before
November 18, 2000, the Company will owe the lenders an $800,000
termination fee.
As of April 30, 1999, holders of approximately 96% in principal amount of
the Company's 12.75% Notes issued under the Indenture, dated as of April
1, 1995, as amended (the "Indenture") agreed to reschedule their portion
of the principal payments on the Notes outstanding under the Indenture.
For holders of the remaining 4% in principal amount of notes, the payment
schedule remains unaffected. As of July 1, 1999, the Company and the
Trustee under the Indenture amended the Indenture to reflect the new
payment schedule. For the rescheduled holders the payment schedule is as
follows:
<TABLE>
<CAPTION>
Date Amount Date Amount
---------------- ------------- ------------- -------------
<S> <C> <C> <C>
5/1/99 $223,874 10/1/00 $335,811
7/1/99 $223,874 1/1/01 $746,246
10/1/99 $223,874 4/1/01 $671,621
1/1/00 $671,621 7/1/01 $444,577
4/1/00 $671,621
7/1/00 $335,811
</TABLE>
In exchange for such amendment to the payment schedule, the Company issued
to the affected holders five-year warrants to purchase 475,000 of the
Company's Common Shares at an exercise price of $0.01 per share. The
Company has agreed to issue shares without transfer restrictions upon
exercise of the warrants. All stock warrants issued under this arrangement
were immediately vested and have a term of five years. The fair value of
stock warrants issued, approximately $400,000, was capitalized as accrued
expenses and is being charged to interest expense over the remaining term
of the Notes using the interest method.
The Company's defaults under the Foothill/Paragon Facility also result in
a default under the Indenture. If the Company's obligations under the
Foothill/Paragon Facility are accelerated, the Company's obligations under
the Indenture will also be accelerated. In addition, the Company has
violated the Indenture covenant requiring it to maintain at least $4.5
million of net worth at the end of each fiscal quarter through the third
quarter of 2000. In addition, if the net worth covenant violation becomes
an event of default and continues, the trustee or the Note holders may
accelerate the obligations under the Indenture. Also, the Company does not
believe that it will have sufficient cash to make the January 1, 2000
sinking fund payment required under the Indenture. The Company is
negotiating with the holders of a majority in principal amount of the
Notes under the Indenture to waive the defaults or convert the Notes into
equity or convertible subordinated indebtedness. In addition, the
Company's current net worth does not meet the requirement for continued
listing of the Company's common shares on The Nasdaq SmallCap market and
will likely result in the delisting of the common shares. Any such
delisting would likely lessen the Note holders' willingness to convert the
Notes under the Indenture into equity or convertible indebtedness.
As a result of the defaults under the Foothill/Paragon Facility and the
Indenture, the indebtedness under the Foothill/Paragon Facility and the
Indenture have been reclassified on the Company's balance sheet as
short-term obligations.
During the first three quarters of 1999, the weighted average interest
rate under the Foothill/Paragon Facility was 8.96%. As of December 8,
1999, the weighted average interest rate under the Paragon/Foothill
Facility was 9.25%.
Page 16 of 22 pages
<PAGE> 17
The Company frequently has not been able to make timely payments to its trade
creditors, factors and other creditors. As of December 13, 1999, the Company had
past due payables in the amount of $10.1 million. The Company had made cash
deposits with factors to obtain trade credit, but in the fourth quarter of 1999
has directed its factors to apply such cash balances to outstanding amounts due
and has attempted to negotiate trade credit directly with manufacturers. As of
December 10, 1999, the Company has almost no trade credit. Substantially all of
the Company's current inventory purchases are being made on a cash-on-delivery
basis and some vendors have suspended deliveries to the Company. These factors
have reduced the Company's ability to make purchases, resulting in reduced
inventory in the Company's stores (approximately $3.4 million below budgeted
inventory receipts in November at cost) and reduced sales. If the Company
continues to be unable to purchase adequate inventories, it will not be able to
continue to operate.
The Company is exploring its strategic alternatives, but believes that it will
require a significant capital infusion to continue operations until any party is
ready to make a proposal for a business combination or other strategic
transaction, even if such a proposal were made in January 2000. 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 required capital infusion would be higher.
In December, the Company's sales and trade credit have been lower than expected
through December 10, 1999. In addition, the Company is dependent on its lenders
under the Foothill/Paragon Facility and the Indenture not accelerating its
required debt payments and is dependent on continued advances under the
Foothill/Paragon Facility, both of which are in the discretion of the lenders.
There can be no assurance that the Company will be able to obtain sufficient
capital infusion at all or in a timely manner or on terms acceptable to the
Company, that its other indebtedness will not be accelerated or that it will
continue to receive advances under the Foothill/Paragon Facility. The lenders
under the Foothill/Paragon Facility currently are not willing to provide the
additional capital.
Even if the Company obtains a capital infusion, there can be no assurance that
any proposal for a strategic transaction would be made, or if one were made that
it would be on terms and conditions acceptable to the Company or that the
parties would be able to consummate such a transaction before the end of
December 1999. If the Company does not obtain an adequate capital infusion and
consummate an acceptable strategic transaction in a timely manner, the Company
would be required to substantially reduce or discontinue its operations, file or
bankruptcy or both. The Company has engaged an investment banker and other
professionals to explore its strategic alternatives, a financial crisis manager
to help manage its liquidity crisis and develop recommendations for
restructuring the Company, and a sales consultant to advise the Company
regarding sales strategies to maximize cash flow. There can be no assurance that
any of these activities will be successful or, even if successful, will provide
the Company with enough cash to continue operations.
The Company closed a store in February of 1999 and opened a new, smaller store
in March of 1999 and another in October of 1999. The Company reviews the
performance of its less profitable existing stores from time to time to
determine whether it could be in the Company's best interests to close any of
these stores. Store closings could have a significant impact on the Company's
sales, expenses and capital requirements and would likely entail additional
one-time charges to effect the closing and to recognize any impairment of assets
resulting from the closing decision and any remaining lease obligations to the
landlord for the closed store.
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. Through October 30,
1999, the Company has spent approximately $300,000 to modify its management
information systems to become Year 2000 compliant. Given that the Company has
substantially completed its installation and testing of its modifications, the
Company has not prepared a contingency plan and does not currently believe that
a contingency plan is necessary. In the event that its current vendors are
unable to certify that they will be Year 2000 compliant 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 that are acceptable to the Company. There can be
no assurance that the Company will be able to find vendors that 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.
Page 17 of 22 pages
<PAGE> 18
Many risks, however, such as the failure to perform by public utilities,
telecommunications providers and financial institutions, and the impact of the
Year 2000 issue on the economy as a whole, are outside the Company's control and
could adversely affect the Company and its ability to conduct its business.
While the Company believes its efforts will adequately identify and address the
Year 2000 issues that are within its reasonable control, the Year 2000 issue
might still have a material adverse impact on the Company's business, financial
condition, or results of operations.
Each of the above statements regarding future revenues, expenses or business
plans (including statements regarding the sufficiency of the Company's cash
resources to meet future liquidity needs and future compliance with financial
covenants) may be a "forward looking statement" within the meaning of the
Securities Exchange Act of 1934. Such statements are subject to important
factors and uncertainties that could cause actual results to differ materially
from those in the forward-looking statement, including the Company's ability to
obtain a capital infusion, the Company's ability to consummate a successful and
timely strategic transaction or reorganization of its business, the Company's
lenders under the Foothill/Paragon Facility and the Indenture no accelerating
any required debt payments and continuing to make advances under the
Foothill/Paragon Facility, both of which are in the discretion of the lenders,
the Company's ability to obtain merchandise, the Company's ability to generate
sufficient cash flow to meet its obligations on a timely basis, the Company's
ability to amend or comply with the terms of the Foothill/Paragon Facility and
the Indenture, the Company's ability to operate profitably in the future, the
level of support of the Company's trade creditors and factors, general trends in
retail clothing apparel purchasing, especially during the Christmas season, the
Company's comparable store sales changes, and the factors set forth in this
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
Item 3. Qualitative and Quantitative Disclosures About Market Risk.
A review of the Company's financial instruments and risk exposures at October
30, 1999 indicated that the Company had exposure to interest rate risk. At
October 30, 1999, the Company concluded that reasonably likely near-term changes
to interest rates should not materially affect the company's financial position,
results of operations or cash flows, or materially change the disclosures in
Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended
January 30,1999, except that both fixed rate and variable rate indebtedness are
currently classified by the Company as due on demand because of the Company's
defaults.
Page 18 of 22 pages
<PAGE> 19
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On July 19, 1999, Elliott Associates, L.P., one of the holders of warrants
issued to holders of Notes issued under the Indenture, exercised warrants to
purchase 284,512 of the Company's Common Shares, par value $0.01 per share, at
$0.01 a share. The Company received an aggregate of $2,845 upon such exercise.
The Common Shares were not registered, but were issued in reliance on the
exemptions from registration contained in Sections 4(2) and 4(6) under the
Securities Act of 1993, as amended.
Item 3. Defaults Upon Senior Securities.
As described in Part I, Item 2 above under the caption "Liquidity and Capital
Resources", the Company is in default under the Foothill/Paragon Facility,
including as a result of (a) failure to meet the rolling three week sales
covenant for seven weeks, (b) failure to meet the weekly purchase covenant for
two weeks, (c) failure to meet the monthly purchase covenant for two months,
(d) failure to deliver timely financial statements to the lenders for one month,
and (e) failure to maintain minimum levels of net worth and earnings before
interest, taxes, depreciation and amortization. As of December 13, 1999, the
Company had $35.8 million in borrowings and $0.7 million in letters of credit
outstanding under the Foothill/Paragon Facility. The lenders under the
Foothill/Paragon Facility continue, in their discretion, to allow the Company to
borrow under the facility to the extent of the borrowing base under the
facility, but have not waived current defaults or changed the covenants. They
may discontinue advances at any time.
Also as described in Part I, Item 2 above under the caption "Liquidity and
Capital Resources", the Company's defaults under the Foothill/Paragon Facility
also result in a default under the Indenture. In addition, the Company has
violated the Indenture covenant requiring it to maintain at least $4.5 million
of net worth at the end of each fiscal quarter through the third quarter of
2000. This violation will be an additional event of default if it continues for
30 days after the Company receives notice from the trustee or the Note holders
of this violation. Also, the Company does not believe that it will have
sufficient cash to make the January 1, 2000 sinking fund payment required under
the Indenture. If the Company's obligations under the Foothill/Paragon Facility
are accelerated, the Company's obligations under the Indenture will also be
accelerated. In addition, if the net worth covenant violation becomes an event
of default and continues, the trustee or the Note holders may accelerate the
obligations
Page 19 of 22 pages
<PAGE> 20
under the Indenture. The Company is negotiating with the holders of a majority
in principal amount of the Notes under the Indenture to waive the defaults or
convert the Notes into equity or convertible subordinated indebtedness. Note
holders holding a majority in principal amount of the Notes are currently
unwilling to waive the defaults without an agreement to convert their Notes into
convertible indebtedness or equity. In addition, the Company's current net worth
does not meet the requirement for continued listing of the Company's common
shares on the Nasdaq SmallCap market and will likely result in the delisting of
the common shares. Any such delisting would likely lessen the Note holders'
willingness to convert the Notes under the Indenture into equity or convertible
indebtedness. As of December 13, 1999, approximately $4.0 million in principal
amount of Notes were outstanding under the Company's Indenture, dated as of
April 1, 1995, as amended (the "Indenture"), under which its 12.75% Notes were
issued.
As a result of the defaults under the Foothill/Paragon Facility and the
Indenture, the indebtedness under the Foothill/Paragon Facility and the
Indenture have been reclassified on the Company's balance sheet as short-term
obligations.
The Company frequently has not been able to make timely payments to its trade
creditors, factors and other creditors. As of December 13, 1999, the Company had
past due payables in the amount of $10.1 million. The Company had made cash
deposits with factors to obtain trade credit, but in the fourth quarter of 1999
has directed its factors to apply such cash balances to outstanding amounts due
and has attempted to negotiate trade credit directly with manufacturers. As of
December 10, 1999, the Company has almost no trade credit. Substantially all of
the Company's current inventory purchases are being made on a cash-on-delivery
basis and some vendors have suspended deliveries to the Company. These factors
have reduced the Company's ability to make purchases, resulting in reduced
inventory in the Company's stores (approximately $_____ million below budgeted
inventory receipts in November) and reduced sales. If the Company continues to
be unable to purchase adequate inventories, it will not be able to continue to
operate.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3(i) Restated Articles of Incorporation, filed July 21, 1999.
4.1 Supplemental Indenture No. 3, dated as of May 1, 1999,
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.
4.2 Agreements, dated as of April 30, 1999 between Gantos,
Inc. and various holders of Notes issued under the
Indenture.
4.3 Form of Common Share Purchase Warrant, dated as of April
30, 1999, between Gantos, Inc. and various holders of
Notes issued under the Indenture.
4.4 Letter Agreement, dated as of October 1, 1999, by and
among Gantos, Inc., Foothill Capital Corporation, and
Paragon Capital, LLC.
4.5 Letter Agreement, dated as of November 8, 1999, by and
among Gantos, Inc., Foothill Capital Corporation, and
Paragon Capital, LLC.
4.6 Notice of Existing Defaults and Reservation of Rights,
dated as of December 1, 1999, from Foothill Capital
Corporation, and Paragon Capital, LLC to Gantos, Inc.
Page 20 of 22 pages
<PAGE> 21
4.7 Letter Agreement, dated as of December 9, 1999, by and
among Gantos, Inc., Foothill Capital Corporation, and
Paragon Capital, LLC.
10.1 Amendment, dated as of November 16, 1999, to Letter
Agreement, dated as of June 20, 1996, between Gantos,
Inc. and Arlene Stern.
10.2 1999 Gantos, Inc. Executive Bonus Plan.
27.1 Financial Data Schedule
Report on Form 8-K.
The Company did not file any reports on Form 8-K during
its fiscal quarter ended October 30, 1999.
Page 21 of 22 pages
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 17, 1999
GANTOS, INC.
-------------------------------
(Registrant)
By: /s/ THOMAS J. VILLANO
----------------------------
THOMAS J. VILLANO
Its: CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER
AND PRINCIPAL FINANCIAL
OFFICER)
Page 22 of 22 pages
<PAGE> 23
EXHIBIT INDEX
DOCUMENT NUMBER AND DESCRIPTION
(a) Exhibits.
3(i) Restated Articles of Incorporation, filed July 21, 1999.
4.1 Supplemental Indenture No. 3, dated as of May 1, 1999,
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.
4.2 Agreements, dated as of April 30, 1999 between Gantos,
Inc. and various holders of Notes issued under the
Indenture.
4.3 Form of Common Share Purchase Warrant, dated as of April
30, 1999, between Gantos, Inc. and various holders of
Notes issued under the Indenture.
4.4 Letter Agreement, dated as of October 1, 1999, by and
among Gantos, Inc., Foothill Capital Corporation, and
Paragon Capital, LLC.
4.5 Letter Agreement, dated as of November 8, 1999, by and
among Gantos, Inc., Foothill Capital Corporation, and
Paragon Capital, LLC.
4.6 Notice of Existing Defaults and Reservation of Rights,
dated as of December 1, 1999, from Foothill Capital
Corporation, and Paragon Capital, LLC to Gantos, Inc.
4.7 Letter Agreement, dated as of December 9, 1999, by and
among Gantos, Inc., Foothill Capital Corporation, and
Paragon Capital, LLC.
10.1 Amendment, dated as of November 16, 1999, to Letter
Agreement, dated as of June 20, 1996, between Gantos,
Inc. and Arlene Stern.
10.2 1999 Gantos, Inc. Executive Bonus Plan.
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 3(i)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU
- -----------------------------------------------------------------------------------------------------------------------------------
Date Received (FOR BUREAU USE ONLY)
This document is effective on the date filed, unless a subsequent effective
JUL 21 1999 date within 90 days after received date is stated in the document.
- -----------------------------------------------------
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Name
Robert J. Krueger FILED
Honigman Miller Schwartz and Cohn JUL 21 1999
- -------------------------------------------------------------------------
Address Administrator
2290 First National Building CORP. SECURITIES & LAND DEV. BUREAU
- -------------------------------------------------------------------------
City State Zip Code
Detroit, Michigan 48226-3583 EFFECTIVE DATE:
- ------------------------------------------------------------------------- ------------------------------------------------------
Document will be returned to the name and address you enter above.
If left blank document will be mailed to the registered office.
RESTATED ARTICLES OF INCORPORATION
FOR USE BY DOMESTIC PROFIT CORPORATIONS
(Please read information and instructions on the last page)
Pursuant to the provisions of Act 284, Public Acts of 1972, the undersigned corporation executes the following
Articles:
- ------------------------------------------------------------------------------------------------------------------------------------
1. The present name of the corporation is: Gantos, Inc.
---------------------------------------------------------------------------------------------------------------------------
---------------
2. The identification number assigned by the Bureau is: 133-486
---------------
3. All former names of the corporation are: Michael J. Leo, Inc.
Gantos, Inc.
Gantos Stores, Inc.
4. The date of filing the original Articles of Incorporation was: November 10, 1952
-----------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
The following Restated Articles of Incorporation supersede the Articles of Incorporation as amended and shall be the Articles
of Incorporation for the corporation:
ARTICLE I
- ------------------------------------------------------------------------------------------------------------------------------------
The name of the corporation is: Gantos, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
ARTICLE II
- ------------------------------------------------------------------------------------------------------------------------------------
The purpose or purposes for which the corporation is formed are: to engage in any activity within the purpose for which
corporations may be organized under the Business Corporation Act of Michigan.
- ------------------------------------------------------------------------------------------------------------------------------------
GOLD SEAL APPEARS ONLY ON ORIGINAL
</TABLE>
<PAGE> 2
ARTICLE III
- --------------------------------------------------------------------------------
The total authorized shares:
Common shares 20,000,000, par value $0.01 per share Preferred shares 2,000,000,
par value $0.01 per share
A statement of all or any of the relative rights, preferences and limitations of
the shares of each class is as follows:
The Board of Directors may cause the corporation to issue preferred
shares in one or more series, each series to bear a distinctive designation and
to have such relative rights and preferences as shall be prescribed by
resolution of the Board. Such resolutions, when filed, shall constitute
amendments to these Restated Articles of Incorporation.
Effective as of the close of business on the date of filing these
Restated Articles of Incorporation (the "Effective Time"), the filing of these
Restated Articles of Incorporation shall effect a reverse stock split on the
basis of one new common share for each three then issued and outstanding common
shares, while maintaining the number of authorized common shares and preferred
shares, and their par values, as set forth in this Article III (the "Reverse
Split").
Immediately as of the Effective Time, and without any action by the
holders of outstanding common shares, but subject to the redemption of
fractional shares described below, outstanding certificates representing the
corporation's common shares shall represent for all purposes, and each common
share issued and outstanding immediately before the Effective Time shall
automatically be converted into, new common shares in the ratio of three old
common shares for one new common share, all by virtue of the Reverse Split and
without any action on the part of the holder of such common shares.
Notwithstanding any of the foregoing to the contrary, no scrip or
fractional common shares shall be issued in connection with the Reverse Split.
In lieu thereof each record holder of common shares as of the Effective Date who
would otherwise have been entitled to receive a fractional new common share
shall, upon surrender of such shareholder's certificates representing pre-split
common shares, have the post-split common shares to which they are entitled
rounded to the nearest whole share and receive either a whole common share or
nothing in lieu of their fractional post-split common share. As of the Effective
Time such fractional shares shall no longer represent equity interests in the
corporation, and shall not be entitled to any voting, dividend or other
shareholder rights; rather, they shall represent only the right to receive the
common shares, if any, described in this paragraph.
- --------------------------------------------------------------------------------
ARTICLE IV
- --------------------------------------------------------------------------------
1. The address of the registered office is:
3366 Kraft S.E., Grand Rapids, Michigan 49588
- -------------------------------------------------------- ----------
(Street Address) (City) (ZIP Code)
2. The mailing address of the registered office, if different than above:
Michigan
- -------------------------------------------------------- ----------
(Street Address or P.O. Box) (City) (ZIP Code)
3. The name of the current resident agent is: Arlene H. Stern
-----------------------------
- --------------------------------------------------------------------------------
ARTICLE V
- --------------------------------------------------------------------------------
Any action required or permitted by the Act to be taken at an annual or
special meeting of shareholders may be taken without a meeting, without prior
notice, and without a vote, if consents in writing, setting forth the action so
taken, are signed by the holders of outstanding shares having not less than the
minimum number of
- --------------------------------------------------------------------------------
<PAGE> 3
- --------------------------------------------------------------------------------
votes that would be necessary to authorize or take the action at a meeting at
which all shares entitled to vote on the action were present and voted. The
written consents shall bear the date of signature of each shareholder who signs
the consent. No written consents shall be effective to take the corporate action
referred to unless, within 60 days after the record date for determining
shareholders entitled to express consent to or to dissent from a proposal
without a meeting, written consents dated not more than 10 days before the
record date and signed by a sufficient number of shareholders to take the action
are delivered to the corporation. Delivery shall be to the corporation's
registered office, its principal place of business, or an officer or agent of
the corporation having custody of the minutes of the proceedings of its
shareholders. Delivery made to a corporation's registered office shall be by
hand or by certified or registered mail, return receipt requested.
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to shareholders who would
have been entitled to notice of the shareholder meeting if the action had been
taken at a meeting and who have not consented in writing.
- --------------------------------------------------------------------------------
ARTICLE VI
- --------------------------------------------------------------------------------
1. No action by written consent of shareholders under Article V shall
be effective unless the proposed action will have been approved by the Board of
Directors before the consent of shareholders is executed.
2. Pursuant to Sections 783 and 784(1)(b) of the Michigan Business
Corporation Act, the corporation expressly elects not to be governed by Chapter
7A of the Michigan Business Corporation Act, being Sections 775 through 784 of
the Michigan Business Corporation Act; provided that the corporation's Board of
Directors may terminate this election in whole or in part by action of the
majority of directors then in office.
- --------------------------------------------------------------------------------
ARTICLE VII
- --------------------------------------------------------------------------------
To the full extent permitted by the Michigan Business Corporation Act
or any other applicable laws presently or hereafter in effect, no director of
the corporation shall be personally liable to the corporation or its
shareholders for or with respect to any acts or omissions in the performance of
his or her duties as a director of the corporation. Any repeal or modification
of this Article VII shall not adversely affect any right or protection of any
director of the corporation existing immediately prior to, or for, or with
respect to, any acts or omissions occurring before, such repeal or modification.
- --------------------------------------------------------------------------------
ARTICLE VIII
- --------------------------------------------------------------------------------
The business and affairs of the corporation shall be managed by or
under the direction of a Board of Directors consisting of not fewer than three
or more than fifteen directors, the exact number of directors to be determined
from time to time solely by a resolution adopted by an affirmative vote of a
majority of the directors then in office. The directors shall be divided into
three classes, designated Class I, Class II and Class III. Each class shall
consist, as nearly as may be possible, of one-third of the total number of
directors constituting the entire Board of Directors. At the 1996 Annual Meeting
of Shareholders, Class I directors shall be elected for a three-year term. At
each succeeding annual meeting of shareholders, commencing in 1997, successors
to the class of directors whose term expires at that annual meeting shall be
elected for a three-year term.
If the number of directors is changed, any increase or decrease shall
be apportioned among the classes of directors so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
When the number of directors is increased by the Board of Directors and any
newly-created directorships are filled by the Board, the additional directors
shall be classified as provided by the Board.
A director shall hold office until the meeting for the year in which
his or her term expires and until his or her successor shall be elected and
shall qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Newly created directorships resulting
from an increase in the number of directors and any vacancy on the Board of
Directors may be filled by only by the Board by an affirmative vote of a
- --------------------------------------------------------------------------------
<PAGE> 4
- --------------------------------------------------------------------------------
majority of the directors then in office. If the number of directors then in
office is less than a quorum, such newly created directorships and vacancies may
be filled by a majority of the directors then in office, although less than a
quorum, or by the sole remaining director. A director elected by the Board of
Directors to fill a vacancy shall hold office until the next election of the
class for which the director shall have been chosen and until his or her
successor shall be elected and shall qualify. A director or the entire Board of
Directors may be removed only for cause, including total and permanent
disability, fraud, criminal conduct, gross abuse of office amounting to a breach
of trust or similar conduct.
Notwithstanding the foregoing, whenever the holders of any one or more
classes of preferred shares or series thereof issued by the corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of shareholders, the election, term of office, filling
of vacancies and other features of such directorship shall be governed by the
terms of these Restated Articles of Incorporation applicable thereto, and such
directors so elected shall not be divided into classes pursuant to this Article.
This Article VIII may not be amended by written consent of the
corporation's shareholders under Article V and may only be amended by the
affirmative vote of holders of 80% of the outstanding common shares of the
corporation, in addition to the vote otherwise required by the Michigan Business
Corporation Act.
- --------------------------------------------------------------------------------
ARTICLE IX
- --------------------------------------------------------------------------------
The shareholders of the corporation do not have a preemptive right to
acquire the corporation's unissued shares except to the extent provided by
agreement between the corporation and one or more shareholders.
- --------------------------------------------------------------------------------
ARTICLE X
- --------------------------------------------------------------------------------
To the extent required by section 1123(a) of the United States Bankruptcy Code,
the corporation shall not issue nonvoting equity securities.
- --------------------------------------------------------------------------------
<PAGE> 5
<TABLE>
<S> <C>
(Additional provisions, if any, may be inserted here: attach
additional pages if needed.)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
5. COMPLETE SECTION(a) IF THE RESTATED ARTICLES WERE ADOPTED BY THE UNANIMOUS CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST
MEETING OF THE BOARD OF DIRECTORS; OTHERWISE, COMPLETE SECTION(b). DO NOT COMPLETE BOTH.
------------------------------------------------------------------------------------------------------------------------------
a. [ ] These Restated Articles of Incorporation were duly adopted on the _____ day of _____, 19_____, in accordance with the
provisions of Section 642 of the Act by the unanimous consent of the incorporator(s) before the first meeting of the
Board of Directors.
Signed this _____ day of _____, 19 _____.
--------------------------------------------------------- ----------------------------------------------------------
--------------------------------------------------------- ----------------------------------------------------------
(Signature of Incorporators, Type or Print Name under Each Signature)
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
b. [X] These Restated Articles of Incorporation were duly adopted on the 22nd day of June, 1999 in accordance with the
provisions of Section 642 of the Act and: (check one of the following)
[ ] were duly adopted by the Board of Directors without a vote of the shareholders. These Restated Articles of Incorporation
only restate and integrate and do not further amend the provisions of the Articles of Incorporation as heretofore amended
and there is no material discrepancy between those provisions and the provisions of these Restated Articles.
[X] were duly adopted by the shareholders. The necessary number of shares as required by statute were voted in favor of these
Restated Articles.
[ ] were duly adopted by the written consent of the shareholders having not less than the minimum number of votes required by
statute in accordance with Section 407(1) of the Act. Written notice to shareholders who have not consented in writing
has been given. (Note: Written consent by less than all of the shareholders is permitted only if such provision appears
in the Articles of Incorporation.)
[ ] were duly adopted by the written consent of all the shareholders entitled to vote in accordance with section 407(2) of
the Act.
Signed this _____ day of July 14, 1999
By /s/ ARLENE M. STERN
-----------------------------------------------------------------------------------------
(Signature of an authorized officer or agent)
Arlene H. Stern, President
-----------------------------------------------------------------------------------------
(Type or Print Name)
------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
GOLD SEAL APPEARS ONLY ON ORIGINAL
</TABLE>
<PAGE> 1
EXHIBIT 4.1
================================================================================
GANTOS, INC.
AND
STATE STREET BANK AND TRUST COMPANY
-----------------------------------------
SUPPLEMENTAL INDENTURE NO. 3 TO INDENTURE
DATED AS OF APRIL 1, 1995
-----------------------------------------
SERIES A PROMISSORY NOTES
SERIES B PROMISSORY NOTES
DATED AS OF JUNE 23, 1999
================================================================================
<PAGE> 2
SUPPLEMENTAL INDENTURE NO. 3
Supplemental Indenture No. 3 (the "Supplemental Indenture"), dated as
of June 23, 1999, between Gantos, Inc., a Michigan corporation (the "Company"),
and State Street Bank and Trust Company, a Massachusetts trust company and
successor to Fleet Bank N.A. (successor to Shawmut Bank Connecticut, National
Association, a national banking association) (the "Trustee").
RECITALS
A. The Company and the Trustee are the parties to the Indenture, dated
as of April 1, 1995 between Company and Trustee, as successor trustee, as
amended by Supplemental Indenture No. 1, dated as of December 15, 1997
("Supplemental Indenture No. 1") and Restated Supplemental Indenture No. 2,
dated as of June 30, 1998 ("Supplemental Indenture No. 2" and, together with
Supplemental Indenture No. 1 and the initial Indenture, the "Indenture").
B. The Company has entered into letter agreements dated April 30, 1999
with Elliott Associates, L.P., Gordian Group, L.P., Cardinal Capital Management,
LLC (on behalf of Cardinal Recovery Partners and Argyle, L.T.D.) and NBD Bank
f/k/a NBD Bank, N.A., who collectively own approximately 97% of the outstanding
Notes (collectively, the "Restructuring Holders"), pursuant to which each
Restructuring Holder agreed to restructure its payments (the "Restructuring").
C. The Trustee has received signed letters from substantially all of
the Holders of the outstanding Notes consenting to the Restructuring by the
Restructuring Holders.
D. This Supplemental Indenture memorializes the terms of the
Restructuring with respect to the Restructuring Holders.
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH, for and in
consideration of the premises, it is mutually agreed and consented, for the
equal and proportionate benefit of the respective Holders from time to time of
the Notes as follows:
1. Capitalized Terms. Capitalized terms used in this Supplemental
Indenture and not defined in this Supplemental Indenture have the meanings given
them in the Indenture.
2. Amendment of Section 2.01(c). Effective on the Effective Date of
this Supplemental Indenture, the second paragraph of Section 2.01(c) of the
Indenture is amended to read as follows:
The Notes shall mature on April 1, 2001, unless earlier called
for redemption, provided that the Notes held by the Restructuring
Holders shall mature on July 1, 2001, unless earlier called for
redemption.
To the extent any of the Notes held by the Restructuring Holders are transferred
to a third party, the new Notes shall reflect the new maturity date.
<PAGE> 3
3. Amendment of Section 3.01(b). Effective on the Effective Date of
this Supplemental Indenture, Section 3.01(b) of the Indenture is amended to read
as follows, with the effect that the Holders of Notes, other than the
Restructuring Holders and their successors and assigns, shall be entitled to the
same amounts on the same dates as they were entitled prior to the execution of
this Supplemental Indenture:
(b) (1) With respect to Notes held by Holders other than the
Restructuring Holders, the Notes shall be subject to mandatory sinking
fund redemption on the following redemption dates at the Redemption
Price and in an amount for each Series of Notes equal to its Pro-Rata
share of the principal amount set forth below:
<TABLE>
<CAPTION>
--------------------------------------------------------
DATE AMOUNT
---- ------
--------------------------------------------------------
<S> <C>
July 1, 1997 - April 1, 1999 Previously Paid
--------------------------------------------------------
July 1, 1999 $774,725.87
--------------------------------------------------------
October 1, 1999 774,725.87
--------------------------------------------------------
January 1, 2000 774,725.87
--------------------------------------------------------
April 1, 2000 774,725.87
--------------------------------------------------------
July 1, 2000 774,725.87
--------------------------------------------------------
October 1, 2000 774,725.87
--------------------------------------------------------
January 1, 2001 774,725.87
--------------------------------------------------------
April 1, 2001 774,725.87
--------------------------------------------------------
</TABLE>
(2) With respect to the Notes held by the
Restructuring Holders, the Notes shall be subject to mandatory sinking
fund redemption on the following redemption dates at the Redemption
Price and in an amount for each Note held by a Restructuring Holder
equal to its pro-rata share (defined for this purpose only as the
amount determined by multiplying the applicable amount set forth below
by a fraction, the numerator of which is the aggregate Outstanding
Notes held by that Restructuring Holder and the denominator of which is
the aggregate of the Outstanding Notes held by all Restructuring
Holders) of the principal amount set forth below:
<TABLE>
<CAPTION>
--------------------------------------------------------
DATE AMOUNT
---- ------
--------------------------------------------------------
<S> <C>
July 1, 1997 - April 1, 1999* Previously Paid
--------------------------------------------------------
</TABLE>
2
<PAGE> 4
<TABLE>
<S> <C>
--------------------------------------------------------
July 1, 1999 $223,874.00
--------------------------------------------------------
October 1, 1999 223,874.00
--------------------------------------------------------
January 1, 2000 671,621.00
--------------------------------------------------------
April 1, 2000 671,621.00
--------------------------------------------------------
July 1, 2000 335,811.00
--------------------------------------------------------
October 1, 2000 335,811.00
--------------------------------------------------------
January 1, 2001 746,246.00
--------------------------------------------------------
April 1, 2001 671,621.00
--------------------------------------------------------
July 1, 2001 444,577.00
--------------------------------------------------------
</TABLE>
*Except for original July 1, 1998 payment, a portion of which was deferred to
June 1, 1999 and which deferred portion is being incorporated into this payment
table.
4. Representations and Warranties. The Company hereby represents and
warrants (which representations and warranties shall survive the execution and
delivery of this Supplemental Indenture) as of the date hereof that:
(a) All representations and warranties contained in the
Indenture are true and correct in all material respects as of the date
of this Supplemental Indenture with the same force and effect as if
made on such date (except to the extent that any such representation or
warranty relates expressly to an earlier date).
(b) The Company has the corporate power and authority to
execute, deliver and carry out the terms and provisions of this
Supplemental Indenture and has taken all necessary corporate action to
authorize the execution, delivery and performance of this Supplemental
Indenture.
(c) This Supplemental Indenture has been duly executed and
delivered and constitutes the legal, valid and binding obligation of
the Company, and is enforceable in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy,
reorganization, insolvency, moratorium and other similar laws affecting
the enforcement of creditors' rights generally and by general equity
principles.
(d) No registration or filing with, consent or approval of, or
other action by, any Federal, State or other governmental agency,
authority or regulatory body is or will be required on behalf of the
Company in connection with the execution, delivery, performance,
validity or enforcement of this Supplemental Indenture, other than any
such registration or filing which has been made or any such consent,
approval or other action which has been
3
<PAGE> 5
obtained and remains in full force and effect and other than the filing
of Form 10-Q or a Form 10-K with the Securities and Exchange
Commission.
(e) The execution, delivery and performance of this
Supplemental Indenture by the Company will not violate any provision of
the certificate or articles of incorporation or bylaws of the Company
(before or immediately after the Effective Date) or any of its
subsidiaries or any law, statute, rule or regulation, or any order or
decree of any court or governmental instrumentality applicable to the
Company or any of its subsidiaries, or, after the Effective Date,
violate, result in the breach of or constitute a default under any
indenture, agreement or other instrument to which the Company or any of
its subsidiaries or any of their respective properties or assets are or
may be bound.
(f) After giving effect to this Supplemental Indenture after
the Effective Date, the Company is in compliance with all of the
various covenants and agreements applicable to it set forth in the
Indenture.
(g) After giving effect to this Supplemental Indenture after
the Effective Date, no event has occurred and is continuing which
constitutes or would constitute, with the giving of notice or the lapse
of time or both, an Event of Default under the Indenture.
(h) The Company has no defense to or setoff, counterclaim or
claim against payment of the Notes or enforcement of the Indenture or
the Notes based upon a fact or circumstance existing or occurring on or
prior to the date of this Supplemental Indenture.
5. Conditions Precedent. Notwithstanding any term or provision of this
Supplemental Indenture to the contrary, no amendment set forth in this
Supplemental Indenture shall become effective until the Trustee shall have
determined that each of the following conditions precedent shall have been
satisfied, such determination to be conclusively evidenced by the Trustee's
execution and delivery of this Supplemental Indenture:
(a) The Company shall have delivered to the Trustee a copy of
the resolution of the Company, certified by the Secretary or an
Assistant Secretary of the Company to have been duly adopted by the
Board of Directors and to be in full force and effect on the date of
such certification, that this Supplemental Indenture has been
authorized by the Company. The Company shall have also delivered to the
Trustee a certification of an officer of the Company that all of the
conditions precedent to the effectiveness of this Supplemental
Indenture shall have been met as of the date of such certificate and
that the representations and warranties set forth in Section 4 of this
Supplemental Indenture are true as of the Effective Date.
(b) The Trustee shall have received an Opinion of Counsel
stating that the execution of this Supplemental Indenture is authorized
or permitted by the Indenture.
(c) Counterparts of this Supplemental Indenture shall have
been duly executed and delivered on behalf of the Company and the
Trustee.
4
<PAGE> 6
(d) The Company shall have received the consent of the
Revolving Credit Lender for the Restructuring.
6. Effective Date. The Effective Date of this Supplemental Indenture
shall be June 1, 1999.
7. Additional Event of Default. It shall constitute an Event of Default
under the Indenture if any of the representations and warranties of the Company
under this Supplemental Indenture shall prove to have been incorrect in any
material respect when made.
8. No Other Change. Except as modified by this Supplemental Indenture,
the Indenture shall continue in full force according to its terms and is hereby
ratified.
5
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed, all as of the day and year first
above written.
GANTOS, INC.
By: /s/ Arlene H. Stern
---------------------------------
Its: President/CEO
-----------------------
Attest:
/s/ Thomas Villano
- -------------------------------
Name: Thomas Villano
--------------------------
Title: CFO
------------------------
STATE STREET BANK AND TRUST COMPANY
By: /s/ Susan T. Keller
---------------------------------
Its: Vice President
-----------------------
6
<PAGE> 8
STATE OF CONNECTICUT )
) ss.:
COUNTY OF FAIRFIELD )
Before me, a Notary Public, in and for said State and County,
duly commissioned and qualified, personally appeared ARLENE STERN, with whom I
am personally acquainted and who, upon oath, acknowledged him/herself to be the
PRESIDENT of GANTOS, INC., and that as such officer, being authorized to do so,
executed the foregoing instrument for the purposes therein contained by signing
the name of the corporation by him/herself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand on this 23rd
day of JUNE ____, 1999.
/s/ Mary Ann Clark
---------------------------
Notary Public
My Commission Expires:
STATE OF CONNECTICUT )
) ss.:
COUNTY OF HARTFORD )
Before me, a Notary Public, in and for said State and County,
duly commissioned and qualified, personally appeared SUSAN T. KELLER, with whom
I am personally acquainted and who, upon oath, acknowledged him/herself to be
the VICE PRESIDENT of STATE STREET BANK AND TRUST CO., and that such officer,
being authorized to do so, executed the foregoing instrument for the purposes
therein contained by signing the name of the corporation by him/herself as such
officer.
IN WITNESS WHEREOF, I have hereunto set my hand on this _____ day of
_____, 199 .
/s/ Dawn P. Heintz
---------------------------
Notary Public
My Commission Expires:
DAWN P. HEINTZ
NOTARY PUBLIC
MY COMMISSION EXPIRES MAY 31, 2002
7
<PAGE> 1
ELLIOTT ASSOCIATES, L.P. EXHIBIT 4.2
712 FIFTH AVENUE
NEW YORK, NEW YORK 10019
April 30, 1999
Gantos, Inc.
1266 East Main Street, 5th Floor
Stamford, Connecticut 06902
State Street Bank and Trust Company
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
Ladies and Gentlemen:
This letter hereby confirms the consent of the undersigned, in accordance
with Section 10.02 of the Indenture, dated as of April 1, 1995 between Gantos,
Inc. (the "Company") and State Street Bank and Trust Company, as successor
trustee, as amended by Supplemental Indenture No. 1, dated as of December
15, 1997 ("Supplemental Indenture No. 1"), and Restated Supplemental
Indenture No. 2, dated as of June 30, 1998 ("Supplemental Indenture No.
2" and, together with the Indenture and Supplemental Indenture No. 1,
the "Indenture"), to the restructuring of the following principal payments:
The undersigned hereby consents that payment of the Pro-Rata share of the
principal amount of the Notes due to be paid to the undersigned and the other
Note holders signing similar letters on the sinking fund redemption dates
described below as "Original Payment Dates" and "Original Payment Amounts," as
set forth in Section 3.01(b) of the Indenture, shall be postponed until the
sinking fund redemption dates and in the amounts (relating only to amounts
payable to the undersigned and the other Note holders signing similar letters)
described below as "Amended Payment Dates" and "Amended Payment Amounts."
<TABLE>
<CAPTION>
Original Original Amended Amended
Payment Dates Payment Amounts Payment Dates Payment Amounts
- ------------- --------------- ------------- ---------------
<S> <C> <C> <C>
05/01/99* $746,246 05/01/99* $223,874
07/01/99 $746,246 07/01/99 $223,874
10/01/99 $746,246 10/01/99 $223,874
01/01/00 $746,246 01/01/00 $671,621
04/01/00 $746,246 04/01/00 $671,621
07/01/00 $746,246 07/01/00 $335,811
10/01/00 $ 71,453 10/01/00 $335,811
01/01/01 $746,246
04/01/01 $671,621
07/01/01 $444,577
</TABLE>
* Deferral of payment originally due on July 1, 1998.
Interest shall accrue on the principal amount of the Notes postponed hereby
at the rate of
<PAGE> 2
12.75% per annum until payment is made, provided that, to the extent interest is
not paid when due, Section 2.09 of the Indenture shall apply thereto. Nothing in
this letter is intended to waive the rights of the undersigned to receive the
sinking fund payments and interest thereon due October 1, 2000, January 1, 2001
and April 1, 2001, to the extent not previously paid or not paid under the terms
of this letter.
Within seven (7) days after the date of this letter, the
Company shall issue to the undersigned additional warrants (substantially in the
form of the warrants previously issued to the undersigned in November 1998)
exercisable until April 30, 2004 to purchase the undersigned's pro rata portion
(based on the assumption that the undersigned and the other Note holders given
similar letters to sign have signed such letters) of 475,000 Gantos Common
Shares at an exercise price of $0.01 per share as consideration for further
postponing the above-described payments of principal under the Notes. The
payment of such consideration shall not change the amount of principal and
interest due with respect to the outstanding Notes. The Company shall use its
reasonable good faith efforts to register the Gantos Common Shares underlying
the warrants on or prior to June 30, 1999 in accordance with the terms of a
Registration Rights Agreement in substantially the form of the Registration
Rights Agreement previously entered into between the parties.
In addition, as additional consideration for postponing the
above-described payments of principal under the Notes, the Company shall pay the
legal fees and expenses of Kleinberg, Kaplan, Wolff & Cohen, P.C. on behalf of
the undersigned incurred in connection with the negotiation of this letter, the
warrants to be issued hereunder and the registration of such warrants.
If this letter is acceptable, please so indicate by
countersigning this letter in the places indicated.
ELLIOTT ASSOCIATES, L.P.
By:__________________________________
Paul E. Singer, General Partner
Accepted:
GANTOS, INC.
By:______________________________________
Arlene H. Stern
President and Chief Executive Officer
Accepted:
STATE STREET BANK AND TRUST COMPANY,
AS TRUSTEE
By:______________________________________
Its:
<PAGE> 3
April 30, 1999
Gantos, Inc.
1266 East Main Street, 5th Floor
Stamford, Connecticut 06902
State Street Bank and Trust Company
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
Ladies and Gentlemen:
This letter hereby confirms the consent of the undersigned, in
accordance with Section 10.02 of the Indenture, dated as of April 1, 1995
between Gantos, Inc. (the "Company") and State Street Bank and Trust Company, as
successor trustee, as amended by Supplemental Indenture No. 1, dated as of
December 15, 1997 ("Supplemental Indenture No. 1"), and Restated Supplemental
Indenture No. 2, dated as of June 30, 1998 ("Supplemental Indenture No. 2" and,
together with the Indenture and Supplemental Indenture No. 1, the "Indenture"),
to the restructuring of the following principal payments:
The undersigned hereby consents that payment of the Pro-Rata
share of the principal amount of the Notes due to be paid to the undersigned and
the other Note holders signing similar letters on the sinking fund redemption
dates described below as "Original Payment Dates" and "Original Payment
Amounts," as set forth in Section 3.01(b) of the Indenture, shall be postponed
until the sinking fund redemption dates and in the amounts (relating only to
amounts payable to the undersigned and the other Note holders signing similar
letters) described below as "Amended Payment Dates" and "Amended Payment
Amounts."
Original Original Amended Amended
Payment Dates Payment Amounts Payment Dates Payment Amounts
- ------------- --------------- ------------- ---------------
05/01/99* $746,246 05/01/99* $223,874
07/01/99 $746,246 07/01/99 $223,874
10/01/99 $746,246 10/01/99 $223,874
01/01/00 $746,246 01/01/00 $671,621
04/01/00 $746,246 04/01/00 $671,621
07/01/00 $746,246 07/01/00 $335,811
10/01/00 $ 71,453 10/01/00 $335,811
01/01/01 $746,246
04/01/01 $671,621
07/01/01 $444,577
* Deferral of payment originally due on July 1, 1998.
Interest shall accrue on the principal amount of the Notes
postponed hereby at the rate of
<PAGE> 4
12.75% per annum until payment is made, provided that, to the extent interest is
not paid when due, Section 2.09 of the Indenture shall apply thereto. Nothing in
this letter is intended to waive the rights of the undersigned to receive the
sinking fund payments and interest thereon due October 1, 2000, January 1, 2001
and April 1, 2001, to the extent not previously paid or not paid under the terms
of this letter.
Within seven (7) days after the date of this letter, the
Company shall issue to the undersigned additional warrants (substantially in the
form of the warrants previously issued to the undersigned in November 1998)
exercisable until April 30, 2004 to purchase the undersigned's pro rata portion
(based on the assumption that the undersigned and the other Note holders given
similar letters to sign have signed such letters) of 475,000 Gantos Common
Shares at an exercise price of $0.01 per share as consideration for further
postponing the above-described payments of principal under the Notes. The
payment of such consideration shall not change the amount of principal and
interest due with respect to the outstanding Notes.
If this letter is acceptable, please so indicate by
countersigning this letter in the places indicated.
GORDIAN GROUP, L.P.
By:
-------------------------------
Its:
Accepted:
GANTOS, INC.
By:
--------------------------------------------
Arlene H. Stern
President and Chief Executive Officer
Accepted:
STATE STREET BANK AND TRUST COMPANY,
AS TRUSTEE
By: ---------------------------------------------
Its:
<PAGE> 5
April 30, 1999
Gantos, Inc.
1266 East Main Street, 5th Floor
Stamford, Connecticut 06902
State Street Bank and Trust Company
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
Ladies and Gentlemen:
This letter hereby confirms the consent of the undersigned, in
accordance with Section 10.02 of the Indenture, dated as of April 1, 1995
between Gantos, Inc. (the "Company") and State Street Bank and Trust Company, as
successor trustee, as amended by Supplemental Indenture No. 1, dated as of
December 15, 1997 ("Supplemental Indenture No. 1"), and Restated Supplemental
Indenture No. 2, dated as of June 30, 1998 ("Supplemental Indenture No. 2" and,
together with the Indenture and Supplemental Indenture No. 1, the "Indenture"),
to the restructuring of the following principal payments:
The undersigned hereby consents that payment of the Pro-Rata
share of the principal amount of the Notes due to be paid to the undersigned and
the other Note holders signing similar letters on the sinking fund redemption
dates described below as "Original Payment Dates" and "Original Payment
Amounts," as set forth in Section 3.01(b) of the Indenture, shall be postponed
until the sinking fund redemption dates and in the amounts (relating only to
amounts payable to the undersigned and the other Note holders signing similar
letters) described below as "Amended Payment Dates" and "Amended Payment
Amounts."
<TABLE>
<CAPTION>
Original Original Amended Amended
Payment Dates Payment Amounts Payment Dates Payment Amounts
- ------------- --------------- ------------- ---------------
<S> <C> <C> <C>
05/01/99* $746,246 05/01/99* $223,874
07/01/99 $746,246 07/01/99 $223,874
10/01/99 $746,246 10/01/99 $223,874
01/01/00 $746,246 01/01/00 $671,621
04/01/00 $746,246 04/01/00 $671,621
07/01/00 $746,246 07/01/00 $335,811
10/01/00 $ 71,453 10/01/00 $335,811
01/01/01 $746,246
04/01/01 $671,621
07/01/01 $444,577
</TABLE>
* Deferral of payment originally due on July 1, 1998
Interest shall accrue on the principal amount of the Notes
postponed hereby at the rate of
<PAGE> 6
12.75% per annum until payment is made, provided that, to the extent interest is
not paid when due, Section 2.09 of the Indenture shall apply thereto. Nothing in
this letter is intended to waive the rights of the undersigned to receive the
sinking fund payments and interest thereon due October 1, 2000, January 1, 2001
and April 1, 2001, to the extent not previously paid or not paid under the terms
of this letter.
Within seven (7) days after the date of this letter, the Company shall
issue to the undersigned additional warrants (substantially in the form of the
warrants previously issued to the undersigned in November 1998) exercisable
until April 30, 2004 to purchase the undersigned's pro rata portion (based on
the assumption that the undersigned and the other Note holders given similar
letters to sign have signed such letters) of 475,000 Gantos Common Shares at an
exercise price of $0.01 per share as consideration for further postponing the
above-described payments of principal under the Notes. The payment of such
consideration shall not change the amount of principal and interest due with
respect to the outstanding Notes.
If this letter is acceptable, please so indicate by countersigning this
letter in the places indicated.
CARDINAL CAPITAL MANAGEMENT, LLC
FOR CARDINAL RECOVERY PARTNERS AND
FOR ARGYLE, L.T.D.
By:
-------------------------------
Its:
Accepted:
GANTOS, INC.
By:
----------------------------------------
Arlene H. Stern
President and Chief Executive Officer
Accepted:
STATE STREET BANK AND TRUST COMPANY,
AS TRUSTEE
By:
----------------------------------------
Its:
<PAGE> 7
April 30, 1999
Gantos, Inc.
1266 East Main Street, 5th Floor
Stamford, Connecticut 06902
State Street Bank and Trust Company
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
Ladies and Gentlemen:
This letter hereby confirms the consent of the undersigned, in
accordance with Section 10.02 of the Indenture, dated as of April 1, 1995
between Gantos, Inc. (the "Company") and State Street Bank and Trust
Company, as successor trustee, as amended by Supplemental Indenture No.
1, dated as of December 15, 1997 ("Supplemental Indenture No. 1"), and
Restated Supplemental Indenture No. 2, dated as of June 30, 1998
("Supplemental Indenture No. 2" and, together with the Indenture and
Supplemental Indenture No. 1, the "Indenture"), to the restructuring of the
following principal payments:
The undersigned hereby consents that payment of the Pro-Rata share of
the principal amount of the Notes due to be paid to the undersigned and the
other Note holders signing similar letters on the sinking fund redemption dates
described below as "Original Payment Dates" and "Original Payment Amounts," as
set forth in Section 3.01(b) of the Indenture, shall be postponed until the
sinking fund redemption dates and in the amounts (relating only to amounts
payable to the undersigned and the other Note holders signing similar letters)
described below as "Amended Payment Dates" and "Amended Payment Amounts."
Original Original Amended Amended
Payment Dates Payment Amounts Payment Dates Payment Amounts
05/01/99* $746,246 05/01/99* $223,874
07/01/99 $746,246 07/01/99 $223,874
10/01/99 $746,246 10/01/99 $223,874
01/01/00 $746,246 01/01/00 $671,621
04/01/00 $746,246 04/01/00 $671,621
07/01/00 $746,246 07/01/00 $335,811
10/01/00 $ 71,453 10/01/00 $335,811
01/01/01 $746,246
04/01/01 $671,621
07/01/01 $444,577
* Deferral of payment originally due on July 1, 1998.
Interest shall accrue on the principal amount of the Notes postponed
hereby at the rate of
<PAGE> 8
12.75% per annum until payment is made, provided that, to the extent interest is
not paid when due, Section 2.09 of the Indenture shall apply thereto. Nothing in
this letter is intended to waive the rights of the undersigned to receive the
sinking fund payments and interest thereon due October 1, 2000, January 1, 2001
and April 1, 2001, to the extent not previously paid or not paid under the terms
of this letter.
Within seven (7) days after the date of this letter, the Company shall
issue to the undersigned additional warrants (substantially in the form of the
warrants previously issued to the undersigned in November 1998) exercisable
until April 30, 2004 to purchase the undersigned's pro rata portion (based on
the assumption that the undersigned and the other Note holders given similar
letters to sign have signed such letters) of 475,000 Gantos Common Shares at an
exercise price of $0.01 per share as consideration for further postponing the
above-described payments of principal under the Notes. The payment of such
consideration shall not change the amount of principal and interest due with
respect to the outstanding Notes.
If this letter is acceptable, please so indicate by countersigning this
letter in the places indicated.
NBD BANK F/K/A NBD BANK, N.A.
By:
--------------------------------
Its:
Accepted:
GANTOS, INC.
By:
----------------------------
Arlene H. Stern
President and Chief Executive Officer
Accepted:
STATE STREET BANK AND TRUST COMPANY,
AS TRUSTEE
By:
----------------------------
Its:
<PAGE> 1
EXHIBIT 4.3
WARRANT
WARRANT NO. NH-__ ________ WARRANTS
GANTOS, INC.
This warrant certificate (the "Warrant Certificate") certifies that,
for value received, _______________ or registered assigns under Section 8 hereof
(the "Holder") is the owner of __________________(______) warrants specified
above (the "Warrants") each of which entitles the Holder thereof to purchase one
(1) fully paid and nonassessable share of common stock, $ .01 par value (the
"Common Stock"), of Gantos, Inc., a corporation organized under the laws of the
State of Michigan (the "Company"), or such other number of shares as may be
determined pursuant to an adjustment in accordance with Section 4 hereof, at the
price per share set forth in Section 4 hereof, subject to adjustment from time
to time pursuant to Section 4 hereof (the "Warrant Price") and subject to the
provisions and upon the terms and conditions set forth herein.
1. Term of Warrant.
Each Warrant is exercisable in full for a period beginning on the date
hereof and ending on May 31, 2004.
2. Method of Exercise and Payment; Issuance of New Warrant Certificate;
Contingent Exercise.
(a) In connection with any exercise pursuant to Section 1
hereof, this Warrant Certificate shall be surrendered (with the notice of
exercise form attached hereto as Exhibit 1 (the "Notice of Exercise") duly
executed) at the principal office of the Company together with the payment to
the Company of cash or a certified check or a wire transfer in an amount equal
to the then applicable Warrant Price multiplied by the number of shares of
Common Stock then being purchased.
(b) Net Issue Election. The holder hereof may elect to
receive, without the payment by such holder of any consideration (other than the
surrender referred to in this Section 2(b)), shares equal to the value of the
Warrants or any portion hereof (as determined below) by the surrender of the
Warrants or such portion to the Company, with the Notice of Exercise duly
executed by such holder, at the office of any duly appointed transfer agent for
the Common Stock or at the office of the Company. Thereupon, the Company shall
issue to such holder such number of fully paid and nonassessable shares of
Common Stock as is
<PAGE> 2
computed using the following formula:
X = Y (A-B)
-------
A
where X = the number of shares of Common Stock to be issued to such
holder pursuant to this Section 2(b).
Y = the number of shares of Common Stock covered by this
Warrant Certificate in respect of which the net issue election is made
pursuant to this Section 2(b).
A = the Fair Market Value (as defined below) of one share of
Common Stock.
B = the Warrant Price then in effect under this Warrant
Certificate at the time the net issue election is made pursuant to this
Section 2(b).
As used herein, "Fair Market Value" per share of Common Stock
as of any date shall mean the numerical average of the fair market value per
share of Common Stock over a period of 21 business days consisting of the
business day on which the Notice of Exercise is received by the Company and the
20 consecutive business days prior to such date. The fair market value per share
of Common Stock for any day shall mean the average of the closing prices of the
Company's Common Stock sold on all securities exchanges on which the Common
Stock may at the time be listed or as quoted on the Nasdaq National Market, or,
if there have been no sales on any such exchange or any such quotation on any
day, the average of the highest bid and lowest asked prices on all such
exchanges or such system at the end of such day, or, if any day the Common Stock
is not so listed, the average of the representative bid and asked prices quoted
in the Nasdaq system as of 4:00 p.m., Boston time, or, if on any day that Common
Stock is not quoted in the Nasdaq system, the average of the highest bid and
lowest asked price on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization. If at any time the Common Stock is not listed on any
securities exchange or quoted in the Nasdaq system or the over-the-counter
market, the current fair market value of Common Stock shall be the highest price
per share which the Company could obtain from a willing buyer (not a current
employee or director) for shares of Common Stock sold by the Company, from
authorized but unissued shares, as determined in good faith by the Board of
Directors of the Company.
(c) The Company agrees that the shares of Common Stock so
purchased shall be deemed to be issued to the Holder hereof as the record owner
of such shares as of the close of business on the date on which this Warrant
Certificate shall have been surrendered and payment made for such shares as
aforesaid. In the event of any exercise of the rights represented by this
Warrant Certificate, certificates for the shares of Common Stock so purchased
shall be delivered to the Holder hereof within ten (10) days thereafter and,
unless all of the Warrants represented by this Warrant Certificate have been
fully exercised or have
<PAGE> 3
expired pursuant to Section 1 hereof, a new Warrant Certificate representing the
shares of Common Stock, if any, with respect to which the Warrants represented
by this Warrant Certificate shall not then have been exercised, shall also be
issued to the Holder hereof within such ten (10) day period.
3. Common Stock Fully Paid; Reservation of Shares.
All Common Stock which may be issued upon the exercise of the Warrants
will, upon issuance, be fully paid and nonassessable, and free from all taxes,
liens and charges with respect to the issue thereof. During the period within
which the rights represented by this Warrant Certificate may be exercised, the
Company will at all times have authorized, and reserved for the purpose of the
issuance upon exercise of the purchase rights evidenced by this Warrant
Certificate, a sufficient number of shares of its Common Stock to provide for
the exercise of the Warrants.
4. Warrant Price; Adjustment of Warrant Price and Number of Shares.
The Warrant Price shall be $0.01 per share of Common Stock, and the
Warrant Price and the number of shares of Common Stock purchasable upon exercise
of the Warrants shall be subject to adjustment from time to time, as follows:
(a) Reclassification, Consolidation or Merger. In case of any
reclassification or change of outstanding securities of the class issuable upon
exercise of the Warrants, or in case of any consolidation or merger of the
Company with or into another corporation or entity, other than a consolidation
or merger with another corporation or entity in which the Company is the
continuing corporation and which does not result in any reclassification,
conversion or change of outstanding securities issuable upon exercise of the
Warrants, the Company, or such successor corporation, as the case may be, shall
execute a new warrant certificate (the "New Warrant Certificate"), providing
that the Holder of this Warrant Certificate shall have the right to exercise
such new warrants and procure upon such exercise, in lieu of each share of
Common Stock theretofore issuable upon exercise of the Warrants, the kind and
amount of shares of stock, other securities, money and property receivable upon
such reclassification, conversion, change, consolidation, or merger by a holder
of one share of Common Stock. Such New Warrant Certificate shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 4. The provisions of this Section 4(a)
shall similarly apply to successive reclassifications, changes, consolidations,
mergers and transfers.
(b) Subdivisions, Combinations and Stock Dividends. If the
Company shall subdivide or combine its Common Stock, or shall pay a dividend
with respect to Common Stock payable in, or make any other distribution with
respect to its Common Stock consisting of, shares of Common Stock, then the
Warrant Price shall be adjusted, from and after the date
3
<PAGE> 4
of determination of shareholders entitled to receive such dividend or
distribution, to that price (rounded to the nearest $.01) determined by
multiplying the Warrant Price in effect immediately prior to such date of
determination by a fraction (i) the numerator of which shall be the total number
of shares of Common Stock outstanding immediately prior to such dividend or
distribution and (ii) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after such dividend or
distribution. Such adjustment shall be made successively whenever such a
dividend or distribution occurs.
Upon each adjustment in the Warrant Price pursuant to this Section 4(b)
hereof, the number of shares of Common Stock purchasable hereunder shall be
adjusted to the product obtained by multiplying the number of shares purchasable
immediately prior to such adjustment in the Warrant Price by a fraction (i) the
numerator of which shall be the Warrant Price immediately prior to such
adjustment and (ii) the denominator of which shall be the Warrant Price
immediately thereafter.
(c) Minimum Adjustment. No adjustment of the Warrant Price or
the number of shares of Common Stock purchasable hereunder shall be made if the
amount of any such Warrant Price adjustment would be an amount less than $.01,
but any such amount shall be carried forward and an adjustment in respect
thereof shall be made at the time of, and together with any subsequent
adjustment which, together with such amount and any other amount or amounts so
carried forward, shall aggregate an increase or decrease of $.01 or more.
5. Notice of Adjustments.
Whenever any adjustment shall be made pursuant to Section 4 hereof, the
Company shall prepare a certificate signed by its chief financial officer
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated,
the Warrant Price after giving effect to such adjustment and the number of
shares of Common Stock then purchasable upon exercise of the Warrants, and shall
cause copies of such certificate to be mailed to the Holder hereof at the
address specified in Section 9(d) hereof, or at such other address as may be
provided to the Company in writing by the Holder hereof.
4
<PAGE> 5
6. Compliance with Securities Act.
(a) If the Holder of this Warrant Certificate represents to
the Company at the time of exercise of the Warrants that it (i) is not currently
an affiliate of the Company and has not been an affiliate of the Company for the
three month period prior to the date hereof and (ii) has owned for the two-year
period prior to exercise of the Warrants all notes owned by it on June 1, 1999
which were issued under the Company's Indenture, dated as of April 1, 1995, as
amended to date, between the Company and State Street Bank and Trust Company (as
successor trustee to Fleet Bank N.A.), then the provisions of Section 6(b) shall
not apply to this Warrant Certificate.
(b) The Holder of this Warrant Certificate, by acceptance
hereof, agrees that the Warrants and the shares of Common Stock to be issued
upon exercise thereof are being acquired for investment and that it will not
offer, sell or otherwise dispose of the Warrants or any shares of Common Stock
to be issued upon exercise thereof except under circumstances which will not
result in a violation of the Securities Act of 1933, as amended (the "Act"), or
applicable state securities or blue sky laws. Upon exercise of the Warrants, the
Holder hereof shall, if requested by the Company, confirm in writing that the
shares of Common Stock so purchased are being acquired for investment and not
with a view toward distribution or resale. All shares of Common Stock issued
upon exercise of the Warrants (unless registered under the Act) shall be stamped
or imprinted with a legend substantially in the following form:
THE SHARES ISSUABLE UPON EXERCISE OF THE WARRANTS HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION
STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR
(2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING
TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES AND BLUE SKY LAWS.
5
<PAGE> 6
7. Transfer.
The Warrants and all rights under this Warrant Certificate are
transferable, in whole or in part, at the principal office of the Company by the
Holder hereof, in person or by its duly authorized attorney, upon surrender of
this Warrant Certificate properly endorsed (with the instrument of transfer form
attached hereto as Exhibit 2 duly executed), together with payment of all
transfer taxes, if any, payable in connection herewith. If the representation in
paragraph 2.a. of Exhibit 2 cannot be made by the Holder at the time of
transfer, any transfer of the Warrants and all rights under this Warrant
Certificate will be subject to the restrictions on transfer set forth in Section
6(b). Each Holder of this Warrant Certificate, by taking or holding the same,
consents and agrees that this Warrant Certificate, when endorsed in blank, shall
be deemed negotiable; provided, however, that the last Holder of this Warrant
Certificate as registered on the books of the Company may be treated by the
Company and all other persons dealing with this Warrant Certificate as the
absolute owner of the Warrants for any purposes and as the person entitled to
exercise the rights represented by this Warrant Certificate or to transfer the
Warrants on the books of the Company, any notice to the contrary
notwithstanding, unless and until such Holder seeks to transfer registered
ownership of the Warrants on the books of the Company and such transfer is
effected.
8. Miscellaneous.
(a) Replacement. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant Certificate and, in the case of loss, theft or destruction, on
delivery of an indemnity agreement or bond reasonably satisfactory in form and
amount to the Company or, in the case of mutilation, on surrender and
cancellation of this Warrant Certificate, the Company, at its expense, will
execute and deliver, in lieu of this Warrant Certificate, a new warrant
certificate of like tenor.
(b) Notice of Capital Changes. In case:
(i) the Company shall declare any dividend or
distribution payable to the holders of shares of Common Stock;
(ii) there shall be any capital reorganization or
reclassification of the capital of the Company, or consolidation or
merger of the Company with, or sale of all or substantially all of its
assets to, another corporation or business organization; or
(iii) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company.
then, in any one or more of said cases, the Company shall give the Holder hereof
prior written notice of such event, in the manner set forth in Section 8(c)
below, at least 30 days prior to the date on which a record shall be taken for
such dividend or distribution or for determining
6
<PAGE> 7
shareholders entitled to vote upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, winding up or the date
when any such transaction shall take place, as the case may be.
(c) Notice. Any notice to be given to either party under this
Warrant Certificate shall be in writing and shall be deemed to have been given
to the Company or the Holder hereof, as the case may be, when delivered in hand
or when sent by first class mail, postage prepaid, addressed, if to the Company,
at its principal office and, if to the Holder hereof, at its address as set
forth in the Company's books and records or at such other address as the Holder
hereof may have provided to the Company in writing.
(d) No Impairment. The Company will not, by amendment of its
Articles of Incorporation, Bylaws or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions of
this Warrant Certificate.
(e) Warrant Holder Not Stockholder. This Warrant Certificate
shall not confer upon the Holder hereof any right to vote or to consent to or
receive notice as a stockholder of the Company, as such, in respect of any
matters whatsoever, or any other rights as a stockholder, prior to the exercise
hereof.
(f) Governing Law; Jurisdiction. This Warrant Certificate
shall be deemed to be a contract made under, and shall be construed in
accordance with, the laws of the State of Delaware without giving effect to
conflict of laws principles except to the extent that the corporate laws of the
State of Michigan are mandatorily applicable thereof. The Company and the Holder
of the Warrant Certificate by acceptance hereof, each hereby agrees that the
state and federal court of New York shall have jurisdiction to hear and
determine any claims or disputes between the Holder and the Company pertaining
directly or indirectly to this Warrant Certificate and all documents,
instruments and agreements executed pursuant hereto, or to any matter arising
therefrom (unless otherwise expressly provided for therein). To the extent
permitted by law, the Company and the Holder of the Warrant Certificate by
acceptance hereof, each hereby expressly submits and consents in advance to such
jurisdiction in any action or proceeding commenced by the Company or any Holder
in any of such courts, and agrees that service of such summons and complaint or
other process or papers may be made by registered or certified mail addressed to
such party at the address to which notices are to be sent to such party pursuant
to this Agreement. To the extent permitted by law, should the Company or the
Holder of this Warrant Certificate, as the case may be, after being so served,
fail to appear or answer to any summons, complaint, or process or papers so
served within 30 days after the mailing thereof, such party shall be deemed in
default and an order and/or judgment may be entered against such party as
demanded or prayed for in such summons, complaint, process or papers. The
exclusive choice of forum set forth in
7
<PAGE> 8
this Section 8(f) shall not be deemed to preclude the enforcement of any
judgment obtained in such forum or the taking of any action to enforce the same
in any other appropriate jurisdiction.
The Company has caused this Warrant Certificate to be executed as of
the 6th day of July, 1999.
GANTOS, INC.
By:
-------------------------------------
Arlene H. Stern
President and Chief Executive Officer
Attest:
By:
---------------------------
Thomas J. Villano
Secretary
8
<PAGE> 9
EXHIBIT 1
NOTICE OF EXERCISE
TO: Gantos, Inc.
1. The undersigned hereby irrevocably elects to purchase ____________________
(_________) shares of the Common Stock, $.01 par value per share, of Gantos,
Inc. (the "Company") covered by Warrant No.___ according to the terms thereof
and herewith makes payment of the Warrant Price of such shares in full.
2. Specify method of exercise by check mark:
__ a. Such payment is hereby made in the amount of $_______ by (i)
cash, (ii) wire transfer or (iii) certified or bank check payable to
Gantos, Inc.
__ b. The holder elects to receive the number of shares of Common Stock
for the value (as determined pursuant to Section 2(b) of the Warrant
Certificate) of the Warrants or the portion thereof specified in 1.
above.
3. Specify by check mark one of the following choices:
__ a. The undersigned hereby represents and warrants to the Company as
follows:
i. The undersigned is not currently an affiliate of the
Company and has not been an affiliate of the Company for
the three month period prior to the date hereof; and
ii. The undersigned has owned for the two-year period prior
to exercise of the Warrants all notes owned by it on June
1, 1999 which were issued under the Company's Indenture,
dated as of April 1, 1995, as amended to date, between
the Company and State Street Bank and Trust Company (as
successor trustee to Fleet Bank N.A.).
__ b. The undersigned is unable to make the representations and
warranties set forth in paragraph 3.a. above.
4. Please issue a certificate or certificates representing said shares of Common
Stock in the name of the undersigned or in such other name as is specified
below:
- ------------------------------------
Signature
- ------------------------------------
Name
- ------------------------------------
Address
Dated:
--------------------
<PAGE> 10
EXHIBIT 2
FORM OF ASSIGNMENT
1. For value received, the undersigned hereby sells, assigns and transfers
unto the rights represented by the within Warrant Certificate to purchase
___________ shares of Common Stock of Gantos, Inc. to which the within Warrant
Certificate relates and appoints _______________________ to transfer such rights
on the books of Gantos, Inc. with full power of substitution in the premises.
2. Specify by check mark one of the following choices:
__ a. The undersigned hereby represents and warrants to the Company as
follows:
i. The undersigned is not currently an affiliate of the Company
and has not been an affiliate of the Company for the three
month period prior to the date hereof; and
ii. The undersigned has owned for the two-year period prior to
transfer of the Warrants all notes owned by it on June 1,
1999 which were issued under the Company's Indenture, dated
as of April 1, 1995, as amended to date, between the Company
and State Street Bank and Trust Company (as successor
trustee to Fleet Bank N.A.).
__ b. The undersigned is unable to make the representations and
warranties set forth in paragraph 2.a. above.
- ------------------------------------
Signature
Dated:
------------------
<PAGE> 11
WARRANT
WARRANT NO. NH-11 52,202 WARRANTS
GANTOS, INC.
This warrant certificate (the "Warrant Certificate") certifies that,
for value received, Cardinal Recovery Partners or registered assigns under
Section 8 hereof (the "Holder") is the owner of Fifty-Two Thousand Two Hundred
Two (52,202) warrants specified above (the "Warrants") each of which entitles
the Holder thereof to purchase one (1) fully paid and nonassessable share of
common stock, $.01 par value (the "Common Stock"), of Gantos, Inc., a
corporation organized under the laws of the State of Michigan (the "Company"),
or such other number of shares as may be determined pursuant to an adjustment in
accordance with Section 4 hereof, at the price per share set forth in Section 4
hereof, subject to adjustment from time to time pursuant to Section 4 hereof
(the "Warrant Price") and subject to the provisions and upon the terms and
conditions set forth herein.
1. Term of Warrant.
Each Warrant is exercisable in full for a period beginning on the date
hereof and ending on May 31, 2004.
2. Method of Exercise and Payment; Issuance of New Warrant Certificate;
Contingent Exercise.
(a) In connection with any exercise pursuant to Section 1
hereof, this Warrant Certificate shall be surrendered (with the notice of
exercise form attached hereto as Exhibit 1 (the "Notice of Exercise") duly
executed) at the principal office of the Company together with the payment to
the Company of cash or a certified check or a wire transfer in an amount equal
to the then applicable Warrant Price multiplied by the number of shares of
Common Stock then being purchased.
(b) Net Issue Election. The holder hereof may elect to
receive, without the payment by such holder of any consideration (other than the
surrender referred to in this Section 2(b)), shares equal to the value of the
Warrants or any portion hereof (as determined below) by the surrender of the
Warrants or such portion to the Company, with the Notice of Exercise duly
executed by such holder, at the office of any duly appointed transfer agent for
the Common Stock or at the office of the Company. Thereupon, the Company shall
issue to
<PAGE> 12
such holder such number of fully paid and nonassessable shares of Common Stock
as is computed using the following formula:
WARRANT
WARRANT NO. NH-12 1,995 WARRANTS
GANTOS, INC.
This warrant certificate (the "Warrant Certificate") certifies that,
for value received, Argyle, L.T.D. or registered assigns under Section 8 hereof
(the "Holder") is the owner of One Thousand Nine Hundred Ninety-Five (1,995)
warrants specified above (the "Warrants") each of which entitles the Holder
thereof to purchase one (1) fully paid and nonassessable share of common stock,
$.01 par value (the "Common Stock"), of Gantos, Inc., a corporation organized
under the laws of the State of Michigan (the "Company"), or such other number of
shares as may be determined pursuant to an adjustment in accordance with Section
4 hereof, at the price per share set forth in Section 4 hereof, subject to
adjustment from time to time pursuant to Section 4 hereof (the "Warrant Price")
and subject to the provisions and upon the terms and conditions set forth
herein.
1. Term of Warrant.
Each Warrant is exercisable in full for a period beginning on the date
hereof and ending on May 31, 2004.
2. Method of Exercise and Payment; Issuance of New Warrant Certificate;
Contingent Exercise.
(a) In connection with any exercise pursuant to Section 1
hereof, this Warrant Certificate shall be surrendered (with the notice of
exercise form attached hereto as Exhibit 1 (the "Notice of Exercise") duly
executed) at the principal office of the Company together with the payment to
the Company of cash or a certified check or a wire transfer in an amount equal
to the then applicable Warrant Price multiplied by the number of shares of
Common Stock then being purchased.
(b) Net Issue Election. The holder hereof may elect to
receive, without the payment by such holder of any consideration (other than the
surrender referred to in this Section 2(b)), shares equal to the value of the
Warrants or any portion hereof (as determined below) by the surrender of the
Warrants or such portion to the Company, with the Notice of Exercise duly
executed by such holder, at the office of any duly appointed transfer agent for
<PAGE> 13
the Common Stock or at the office of the Company. Thereupon, the Company shall
issue to such holder such number of fully paid and nonassessable shares of
Common Stock as is computed using the following formula:
WARRANT
WARRANT NO. NH-13 288,135 WARRANTS
GANTOS, INC.
This warrant certificate (the "Warrant Certificate") certifies that,
for value received, Elliott Associates, L.P. or registered assigns under Section
8 hereof (the "Holder") is the owner of Two Hundred Eighty-Eight Thousand One
Hundred Thirty-Five (288,135) warrants specified above (the "Warrants") each of
which entitles the Holder thereof to purchase one (1) fully paid and
nonassessable share of common stock, $.01 par value (the "Common Stock"), of
Gantos, Inc., a corporation organized under the laws of the State of Michigan
(the "Company"), or such other number of shares as may be determined pursuant to
an adjustment in accordance with Section 4 hereof, at the price per share set
forth in Section 4 hereof, subject to adjustment from time to time pursuant to
Section 4 hereof (the "Warrant Price") and subject to the provisions and upon
the terms and conditions set forth herein.
1. Term of Warrant.
Each Warrant is exercisable in full for a period beginning on the date
hereof and ending on May 31, 2004.
2. Method of Exercise and Payment; Issuance of New Warrant Certificate;
Contingent Exercise.
(a) In connection with any exercise pursuant to Section 1
hereof, this Warrant Certificate shall be surrendered (with the notice of
exercise form attached hereto as Exhibit 1 (the "Notice of Exercise") duly
executed) at the principal office of the Company together with the payment to
the Company of cash or a certified check or a wire transfer in an amount equal
to the then applicable Warrant Price multiplied by the number of shares of
Common Stock then being purchased.
(b) Net Issue Election. The holder hereof may elect to
receive, without the payment by such holder of any consideration (other than the
surrender referred to in this Section 2(b)), shares equal to the value of the
Warrants or any portion hereof (as determined below) by the surrender of the
Warrants or such portion to the Company, with the Notice of
<PAGE> 14
Exercise duly executed by such holder, at the office of any duly appointed
transfer agent for the Common Stock or at the office of the Company. Thereupon,
the Company shall issue to such holder such number of fully paid and
nonassessable shares of Common Stock as is computed using the following formula:
WARRANT
WARRANT NO. NH-14 119,273 WARRANTS
GANTOS, INC.
This warrant certificate (the "Warrant Certificate") certifies that,
for value received, NBD Bank or registered assigns under Section 8 hereof (the
"Holder") is the owner of One Hundred Nineteen Thousand Two Hundred
Seventy-Three (119,273) warrants specified above (the "Warrants") each of which
entitles the Holder thereof to purchase one (1) fully paid and nonassessable
share of common stock, $.01 par value (the "Common Stock"), of Gantos, Inc., a
corporation organized under the laws of the State of Michigan (the "Company"),
or such other number of shares as may be determined pursuant to an adjustment in
accordance with Section 4 hereof, at the price per share set forth in Section 4
hereof, subject to adjustment from time to time pursuant to Section 4 hereof
(the "Warrant Price") and subject to the provisions and upon the terms and
conditions set forth herein.
1. Term of Warrant.
Each Warrant is exercisable in full for a period beginning on the date
hereof and ending on May 31, 2004.
2. Method of Exercise and Payment; Issuance of New Warrant Certificate;
Contingent Exercise.
(a) In connection with any exercise pursuant to Section 1
hereof, this Warrant Certificate shall be surrendered (with the notice of
exercise form attached hereto as Exhibit 1 (the "Notice of Exercise") duly
executed) at the principal office of the Company together with the payment to
the Company of cash or a certified check or a wire transfer in an amount equal
to the then applicable Warrant Price multiplied by the number of shares of
Common Stock then being purchased.
(b) Net Issue Election. The holder hereof may elect to
receive, without the payment by such holder of any consideration (other than the
surrender referred to in this Section 2(b)), shares equal to the value of the
Warrants or any portion hereof (as determined
<PAGE> 15
below) by the surrender of the Warrants or such portion to the Company, with the
Notice of Exercise duly executed by such holder, at the office of any duly
appointed transfer agent for the Common Stock or at the office of the Company.
Thereupon, the Company shall issue to such holder such number of fully paid and
nonassessable shares of Common Stock as is computed using the following formula:
WARRANT
WARRANT NO. NH-15 13,395 WARRANTS
GANTOS, INC.
This warrant certificate (the "Warrant Certificate") certifies that,
for value received, Gordian Group, L.P. or registered assigns under Section 8
hereof (the "Holder") is the owner of Thirteen Thousand Three Hundred
Ninety-Five (13,395) warrants specified above (the "Warrants") each of which
entitles the Holder thereof to purchase one (1) fully paid and nonassessable
share of common stock, $.01 par value (the "Common Stock"), of Gantos, Inc., a
corporation organized under the laws of the State of Michigan (the "Company"),
or such other number of shares as may be determined pursuant to an adjustment in
accordance with Section 4 hereof, at the price per share set forth in Section 4
hereof, subject to adjustment from time to time pursuant to Section 4 hereof
(the "Warrant Price") and subject to the provisions and upon the terms and
conditions set forth herein.
1. Term of Warrant.
Each Warrant is exercisable in full for a period beginning on the date
hereof and ending on May 31, 2004.
2. Method of Exercise and Payment; Issuance of New Warrant Certificate;
Contingent Exercise.
(a) In connection with any exercise pursuant to Section 1
hereof, this Warrant Certificate shall be surrendered (with the notice of
exercise form attached hereto as Exhibit 1 (the "Notice of Exercise") duly
executed) at the principal office of the Company together with the payment to
the Company of cash or a certified check or a wire transfer in an amount equal
to the then applicable Warrant Price multiplied by the number of shares of
Common Stock then being purchased.
(b) Net Issue Election. The holder hereof may elect to
receive, without the payment by such holder of any consideration (other than the
surrender referred to in this
<PAGE> 16
Section 2(b)), shares equal to the value of the Warrants or any portion hereof
(as determined below) by the surrender of the Warrants or such portion to the
Company, with the Notice of Exercise duly executed by such holder, at the office
of any duly appointed transfer agent for the Common Stock or at the office of
the Company. Thereupon, the Company shall issue to such holder such number of
fully paid and nonassessable shares of Common Stock as is computed using the
following formula:
<PAGE> 1
EXHIBIT 4.4
[FOOTHILL, INC. LETTERHEAD]
October 1, 1999
BY FAX
Gantos, Inc.
Attention: President
1266 E. Main Street, 5th Floor
Stamford, CT 06902
Re: Extension of Certain Terms of the Second Amendment to
Loan and Security Agreement by and between
Gantos, Inc. (the "Borrower"), the Lenders and the Agent
--------------------------------------------------------
Ladies and Gentlemen:
Reference is made to the Loan and Security Agreement dated November 18,
1998 by and among the Borrower and Foothill, as Agent, and the Lenders (as
amended by a certain First Amendment to Loan and Security Agreement dated as of
February 28, 1999 by and among the Borrower and Foothill as Agent and the
Lenders, as further by a certain Second Amendment to Loan and Security Agreement
dated as of August 27, 1999 by and among the Borrower and Foothill as Agent and
the Lenders (the "Second Amendment"), as further amended by and through the date
of this Third Amendment, and as hereafter amended and/or restated from time to
time, the "Loan Agreement"). Capitalized terms not defined herein shall have the
meaning set forth in the Loan Agreement.
Pursuant to the terms and conditions of the Second Amendment, the
Lenders agreed to extend a certain $1,500,000 overadvance to the Borrower
through the earlier to occur of (i) the Borrower's sale of its private label
credit portfolio and (ii) September 30, 1999 (the "Second Amendment Deadline").
The Borrower has requested that the Lenders extend the Second Amendment Deadline
through the earlier to occur of (i) the sale of the Borrower's private label
credit portfolio and (ii) October 26, 1999. The Lenders are willing to do so on
the terms and conditions set forth below:
<PAGE> 2
Gantos, Inc.
October 1, 1999
Page 2
I. The Borrower shall deliver to the Agent on or before October 7, 1999,
detailed, pro forma weekly cash flow projections for the period December 1, 1999
through February 28, 2000 that do not reflect the sale of the Borrower's private
label credit portfolio, in form and substance satisfactory to the Agent (the
"Projections");
I. The Borrower shall continue to meet all covenants set forth in amended
Schedule 7.21 including, but not limited to, the Minimum Purchases Test
(monthly) and the Minimum Purchase Test (weekly) through any extension period;
I. The Borrower shall pay to the Agent, for the ratable benefit of the Lenders,
an extension fee of $10,000 on October 1, 1999; and
I. The Borrower shall deliver to the Agent such other information, documents and
reports as the Lenders may reasonably request.
Based on the Borrower's representation that the Borrower is not in default
under the Loan Agreement, and subject to the conditions set forth above, the
Lenders hereby agree to extend the Second Amendment Deadline through the earlier
to occur of (i) the sale of the Borrower's private label credit portfolio and
(ii) October 26, 1999. The Borrower agrees that any failure to meet the
conditions set forth above, including but not limited to, delivery of the
Projections by October 7, 1999, shall constitute an Event of Default under the
Loan Agreement.
The Borrower, the Agent and the Lenders are discussing several additional
amendments to the Loan Agreement. It is the intention of all parties that the
issues raised herein will be incorporated into a formal amendment of the Loan
Agreement and, accordingly, all parties have agreed to avoid the expense of a
formal amendment to the Loan Agreement at this time.
This letter agreement is intended to be a Loan Document. Except as expressly
set forth above, the Loan Agreement and each of the other Loan Documents shall
be unaffected hereby and shall continue in full force and effect. The
undersigned Lenders have not waived any terms of the Loan Agreement and
expressly reserve their rights to enforce all provisions of the Loan Agreement
and the other Loan Documents at law, in equity or otherwise. The undersigned
Lenders do not hereby obligate themselves to grant any similar extension at any
time in the future.
<PAGE> 3
Gantos, Inc.
October 1, 1999
Page 3
Please acknowledge your agreement with the foregoing by signing in the space
indicated below.
FOOTHILL CAPITAL CORPORATION,
For itself and as Agent
By:
(Title)
PARAGON CAPITAL, LLC, as a Lender
By:
(Title)
ACKNOWLEDGED
AND AGREED
GANTOS, INC.
By:
(Title)
cc: Peter M. Palladino, Esq.
<PAGE> 1
EXHIBIT 4.5
November 8, 1999
BY FAX
Gantos, Inc.
Attention: President
1266 E. Main Street, 5th Floor
Stamford, CT 06902
Re: Gantos, Inc. - Existing Defaults and Overadvance
Ladies and Gentlemen:
Reference is made to the Loan and Security Agreement dated November 18,
1998 by and among the Borrower and Foothill, as Agent, and the Lenders (as
amended by a certain First Amendment to Loan and Security Agreement dated as of
February 28, 1999 by and among the Borrower and Foothill as Agent and the
Lenders, as further amended by a certain Second Amendment to Loan and Security
Agreement dated as of August 27, 1999 by and among the Borrower and Foothill as
Agent and the Lenders (the "Second Amendment"), as further amended by and
through the date of this letter agreement, and as hereafter amended and/or
restated from time to time, the "Loan Agreement"). Capitalized terms not defined
herein shall have the meaning set forth in the Loan Agreement.
1. Existing Defaults
Pursuant to the terms of the Second Amendment as extended by a certain
letter agreement dated October 1, 1999 (the "Letter Agreement") the Borrower is
required to meet certain retail performance covenants as set forth on Amended
Schedule 7.21 to the Loan Agreement (a copy of which is attached hereto).
Amended Schedule 7.21 provides, among other things, that (i) on a rolling three
week basis the Borrower's Sales shall not vary from plan by more than ten
percent (10%) (the "Sales Covenant") and (ii) on a weekly basis, Total Actual
Purchases, as a percentage of Planned Purchases at cost, shall not vary
negatively from plan in any week by more than twenty percent (20%) (the "Weekly
Purchase Covenant"). The Borrower acknowledges that it has failed to meet the
Sales Covenant for the weeks ending October 16 and 23, 1999 and failed to meet
the
<PAGE> 2
Gantos, Inc.
November 8, 1999
Page 2
Weekly Purchase Covenant for the weeks ending October 9 and 16, 1999,
(collectively, the "Existing Defaults"). The Borrower has requested that the
Lenders waive the Existing Defaults.
2. Overadvance
Pursuant to the terms and conditions of the Second Amendment as extended
by Letter Agreement, the Lenders agreed to extend a certain $1,500,000
overadvance to the Borrower through October 26, 1999. The Borrower has requested
that the Lenders (i) extend an overadvance in the amount $1,500,000 as of the
date hereof through November 15, 1999, (ii) reduce the overadvance to $500,000
as of November 16, 1999 through November 30, 1999 and (iii) eliminate the
overadvance as of December 1, 1999.
3. Terms and Conditions for Waiver of Existing Defaults and Overadvance
In consideration of the mutual promises and agreements contained herein,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Lenders are willing to waive the Existing
Defaults and extend the overadvance as described in Section 2 above on the terms
and conditions set forth below:
a) The Borrower and Lenders agree to eliminate the so-called "LCM
Accrual" which is currently being added into the Borrowing Base. In
order to eliminate such LCM Accrual, the Lenders will create an
Adjustment Reserve the balance of which will be deducted each month
from the Borrower Base. The Adjustment Reserve will be calculated as
follows:
<TABLE>
Month Adjustment Reserve
----- ------------------
<S> <C>
December 1999 $250,000
January 2000 $500,000
February 2000 $600,000
</TABLE>
Beginning in March 2000, the Adjustment Reserve will be increased by
$100,000 each month until the Adjustment Reserve equals the LCM
Accrual included in the Borrowing Base. Once the Adjustment Reserve
and the LCM Accrual are equal, the LCM Accrual will be permanently
removed from the Borrowing Base and the Adjustment Reserve will be
removed by the Lenders. The Lenders reserve their right under Section
2.1(b) of the Loan Agreement to create any additional reserves they
deem necessary.
b) The Borrower shall continue to meet all covenants set forth in the
amended Schedule 7.21 until agreed otherwise in writing by the
Lenders;
c) This letter agreement 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;
<PAGE> 3
Gantos, Inc.
November 8, 1999
Page 3
d) 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;
e) Within five days of the execution of this letter agreement, the
Borrower shall deliver to the Agent a covenant compliance certificate
for the immediately preceding month demonstrating the Borrower's
ongoing compliance with the covenants set forth in the Loan
Agreement, as of the date hereof;
f) The Borrower shall pay to the Agent, for the ratable benefit of the
Lenders, a further extension fee of $10,000 as of the date hereof;
and
g) No later than November 23, 1999 the Borrower shall deliver to the
Agent all projections required by the Lenders in the form requested
thereby.
4. Acknowledgment of Defaults.
The Borrower acknowledges and confirms to the Lenders that the Borrower is
in default of its obligations under the Loan Agreement by reason of the
occurrence of the Existing Defaults. The Borrower acknowledges and agrees with
the Lenders that the Lenders' waiver hereunder relates solely to the Existing
Defaults as of the dates expressly set forth in this Letter Agreement and to no
other defaults or Events of Default, now existing or hereafter arising and now
known or unknown to the Lenders. The Borrower acknowledges and agrees with the
Lenders that by reason of the occurrence of the Existing Defaults, the Lenders
are currently entitled to exercise the full range of their rights and remedies
against the Borrower under the Loan Documents, without defense or counterclaim
of any kind on the part of the Borrower.
5. Representations and Warranties; Confirmation of Representations,
Warranties.
This letter agreement 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
letter agreement, 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 letter agreement, and that, as of the date hereof,
except as expressly set forth above, no Default or Event of Default has occurred
and is
<PAGE> 4
Gantos, Inc.
November 8, 1999
Page 4
continuing under the Loan Agreement or any other Loan Document. The Borrower
acknowledges and agrees that this letter agreement shall become a part of the
Loan Agreement and shall be a Loan Document.
6. Conditions to Lending; Compliance with Loan Documents, Borrower's
Covenant.
The Borrower hereby represents and warrants to the Agent and the Lenders
that all of the conditions precedent to lending specified in Section 4.2 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.
7. 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 letter agreement 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 letter agreement 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 letter agreement
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 letter agreement.
8. Miscellaneous.
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 letter agreement and as further amended and/or restated from time to time
hereafter. The Borrower, the Agent and the Lenders are discussing several
additional amendments to the Loan Agreement. It is the intention of all parties
that the issues raised herein will be incorporated into a formal amendment of
the Loan Agreement and, accordingly, all parties have agreed to avoid the
expense of a formal amendment to the Loan Agreement at this time. Except as
expressly set forth above, the Loan Agreement and each of the other Loan
Documents shall be unaffected hereby and shall continue in full force and
effect.
Except as expressly set forth above, regarding the Existing Defaults, the
undersigned Lenders have not waived any terms of the Loan Agreement and
expressly reserve their
<PAGE> 5
Gantos, Inc.
November 8, 1999
Page 5
rights to enforce all provisions of the Loan Agreement and the other Loan
Documents at law, in equity or otherwise. The undersigned Lenders do not hereby
obligate themselves to grant any other waiver similar extension at any time in
the future.
Please acknowledge your agreement with the foregoing by signing in the
space indicated below.
FOOTHILL CAPITAL CORPORATION,
For itself and as Agent
By:
(Title)
PARAGON CAPITAL, LLC, as a Lender
By:
(Title)
ACKNOWLEDGED
AND AGREED
GANTOS, INC.
By:
(Title)
cc: Peter M. Palladino, Esq.
<PAGE> 6
Gantos, Inc.
November 8, 1999
Page 6
AMENDED
SCHEDULE 7.21
INVENTORY COMPOSITION AND IMBALANCE GUIDELINES:
Total EOM Dress Inventory at Cost (including Department # 500, 1300, 1500) shall
not be less than 25% of total EOM Inventory at Cost.
MIN/MAX INVENTORY
Measured monthly, on a rolling three-month basis, commencing EOM February 1999,
average EOM inventory at cost shall be at least 8.50% of plan, and not more than
115.0% of plan.
MINIMUM PURCHASES TEST (MONTHLY):
Measured monthly on a rolling two month basis, Total Actual Purchases, as a
percentage of Planned Purchases at cost, shall not vary negatively from plan in
any one fiscal month by more than 10.0%.
MINIMUM PURCHASE TEST (WEEKLY): Measured weekly beginning August 30, 1999, Total
Actual Purchases, as a percentage of Planned Purchases at cost, shall not vary
negatively from plan in any week by more than 20.0%
SALES:
Measured weekly on a rolling three-week basis, commencing with the third fiscal
week of February 1999, Sales shall not vary negatively from plan by more than
10%. If Sales vary negatively from plan by more than 10%, the advance rate will
be decreased by 1.5 ppts the first week and 0.5 ppt each week until such time as
Sales are within 90% of plan as measured on a rolling three-week basis. In the
event that weekly plan sales figures are not provided by the Company, weekly
plan sales shall be calculated based upon the monthly plan sales figure per the
Company's business plan divided by 4.3 average weeks.
<PAGE> 1
EXHIBIT 4.6
December 1, 1999
BY FAX
Gantos, Inc.
Attention: President
1266 E. Main Street, 5th Floor
Stamford, CT 06902
Re: Gantos, Inc. - Existing Defaults
Ladies and Gentlemen:
Reference is made to the Loan and Security Agreement dated November 18,
1998 by and among Gantos, Inc. (the "Borrower") and Foothill Capital
Corporation, as Agent (the "Agent"), and the Lenders party thereto (as amended
by a certain First Amendment to Loan and Security Agreement dated as of February
28, 1999 by and among the Borrower and the Agent and the Lenders, as further
amended by a certain Second Amendment to Loan and Security Agreement dated as of
August 27, 1999 by and among the Borrower, the Agent and the Lenders (the
"Second Amendment"), as further amended by and through the date of this letter,
and as hereafter amended and/or restated from time to time, the "Loan
Agreement"). Capitalized terms not defined herein shall have the meaning set
forth in the Loan Agreement.
The Borrower is required to meet certain retail performance covenants
as set forth on Amended Schedule 7.21 to the Loan Agreement. Amended Schedule
7.21 provides, among other things, that on a rolling three week basis the
Borrower's Sales shall not vary from plan by more than ten percent (10%) (the
"Sales Covenant"). The Borrower has failed to meet the Sales Covenant for the
weeks ending October 30, 1999 and November 6, 1999.
Pursuant to subsection 6.2(c) of the Loan Agreement, the Borrower is
required, within thirty (30) days of the fiscal month end, to provide the Agent
with financial statements for such month, including balance sheet, income
statement, cash flow report and comparison of store sales. As of the date
hereof, the Agent has not received the required financial statements for the
months of September and October 1999 (collectively, the "Financial Statements").
<PAGE> 2
Gantos, Inc.
December 1, 1999
Page 2
Moreover the Borrower has verbally informed the Agent that the Borrower
is in default of certain other financial covenants including, but not limited
to, the Minimum Purchase Test (both weekly and monthly). In the absence of the
above referenced Financial Statements, it is impossible for the Agent to
determine the existence of these or additional financial covenant defaults.
Pursuant to a certain letter agreement dated November 8, 1999 by and
between the Borrower, the Agent and the Lenders, the Borrower was required to
deliver projections to the Lenders by November 23, 1999 setting forth the
financial position of the Borrower in the event the Borrower did not have a
liquidity event (the "Plan"). The Borrower has failed to deliver the Plan to the
Lenders as of the date hereof (collectively, with each of the covenant defaults
described above, the "Existing Defaults"). The Lenders are informed that the
Borrower has engaged a workout consultant from Deloite & Touche LLP to assist it
in developing the above-referenced Plan. It is imperative that the Agent receive
the Plan no later than December 6, 1999.
The Borrower is hereby informed that commencing December 1, 1999, in
calculating the Borrowing Base under subsection 2.1 of the Loan Agreement,
pursuant to the Agent's rights under subsection 2.1(b) thereof, the Agent shall
reduce the percentage advanced for the Special Sub Line Advance against the Cost
value of Eligible Inventory (the "Inventory Advance Rate") as set forth in
subsection 2.1(a)(ii)(x), by two percent (2%) to eight percent (8%). Moreover,
the Agent reserves its right, pursuant to the Loan Agreement, to further reduce
the Inventory Advance Rate by an incremental two percent (2%) for each remaining
week in December.
The Lenders do not waive the Existing Defaults and reserve their rights
to enforce the provisions of Loan Agreement and the other Loan Documents at law,
at equity or otherwise. The Borrower is further informed (i) that the Borrower
is in default of its obligations under the Loan Agreement by reason of the
occurrence of the Existing Defaults and (ii) the Agent is making the reduction
in the Inventory Advance Rate. The Borrower is further informed that (i) the
Lenders are not waiving the Existing Defaults and (ii) by reason of the
occurrence of the Existing Defaults, the Lenders are currently entitled to
exercise the full range of their rights and remedies against the Borrower under
the Loan Documents, without defense or counterclaim of any kind on the part of
the Borrower.
FOOTHILL CAPITAL CORPORATION,
For itself and as Agent
By:
(Title)
PARAGON CAPITAL, LLC, as a Lender
By:
(Title)
cc: Peter M. Palladino, Esq.
<PAGE> 1
EXHIBIT 4.7
[FOOTHILL LETTERHEAD]
VIA TELECOPY
December 9, 1999
Gantos, Inc.
1266 E. Main Street, 5th Floor
Stamford, CT 06902
Attention: President
RE: Gantos, Inc. (the "Borrower") - Existing Defaults; Full Reservation of
Rights; Limitations on Advances.
Ladies and Gentlemen:
Reference is made to the Loan and Security Agreement dated November 18,
1998 by and among the Borrower and Foothill, as Agent (the "Agent"), and the
Lenders (as amended by a certain First Amendment to Loan and Security Agreement
dated as of February 28, 1999 by and among the Borrower and Foothill as Agent
and the Lenders, as further amended by a certain Second Amendment to Loan and
Security Agreement dated as of August 27, 1999 by and among the Borrower and
Foothill as Agent and the Lenders (the "Second Amendment"), as further amended
by and through the date of this letter agreement, and as hereafter amended
and/or restated from time to time, the "Loan Agreement"). Capitalized terms not
defined herein shall have the meaning set forth in the Loan Agreement. Reference
is further made to the Notice of Existing Defaults and Reservation of Rights
dated December 1, 1999 (the "Notice") pursuant to which the Lenders formally
notified the Borrower (i) of certain Events of Default under the Loan Agreement,
(ii) that any further advances under the Loan Agreement would only be made in
the Lenders' discretion, and (iii) that the Lenders were reserving all of their
rights to enforce the provisions of the Loan Agreement and the other Loan
Documents at law, at equity or otherwise.
1. Existing Defaults
The Borrower acknowledges and agrees that as of the date hereof it is
in default of its obligations to the Lenders by reason of the occurrence of the
following Events of Default:
<PAGE> 2
- Failure to meet the rolling three week sales covenant set
forth on amended Schedule 7.21 for the weeks ended October 16,
23, and 30, 1999 and November 6, 13, 20, and 27, 1999;
- Failure to meet the weekly purchase covenant set forth on
amended Schedule 7.21 for the weeks ended October 8 and 16,
1999;
- Failure to meet the monthly purchase covenant set forth on
amended Schedule 7.21 for the months of August and September
1999; and
- Failure to deliver timely financial statements to the
Lenders for the month of October 1999 (collectively, the
"Existing Defaults").
The above list of Existing Defaults represents only the Events of
Default which the Lenders can confirm based on the financial information and
reports delivered by the Borrower as of the date of this letter.
2. Cash Budget
As required by the Notice, on December 6, 1999, the Borrower delivered
to the Lenders a detailed weekly cash budget for December 1999, a copy of which
is attached hereto as Exhibit A (the "Budget").
3. Acknowledgment of Existing Defaults; No Forbearance Obligations;
Limitations on Advances
(a) The Borrower acknowledges and confirms to the Lenders that the
Borrower is in default of its obligations under the Loan Agreement by reason of
the occurrence of the Existing Events of Default listed in Section 1 hereof. The
Borrower acknowledges and agrees with the Lenders that by reason of the
occurrence and continuance of the Existing Events of Default, the Lenders are
currently and shall remain, at all times hereafter, entitled to exercise the
full range of their rights and remedies against the Borrower under the Loan
Documents and applicable law, without defense or counterclaim of any kind on the
part of the Borrower.
(b) The Borrower further acknowledges and agrees that as set forth in
the Notice, any advances under the Loan Agreement are and shall continue to be
made in the Lenders' sole discretion. Without limiting the foregoing, any
discretionary advances so funded by the Lenders shall be (i) subject to the
applicable advance rates, borrowing base limitations and related provisions set
forth in the Loan Agreement, and (iii) limited to the amount necessary to fund
projected disbursements set forth in the Budget through the date of any such
requested advance.
<PAGE> 3
(c) The Borrower acknowledges and agrees that the provisions of this
letter agreement are not intended to and shall not be claimed by the Borrower to
constitute an agreement by the Lenders to continue funding advances to the
Borrower or to forbear from exercising their existing rights and remedies in
respect of Existing Events of Defaults under the Loan Documents, all of which
are expressly reserved and are not, and shall in no way be deemed or construed
as, a waiver by the Lenders of such Existing Events of Default or any other
Event of Default now existing or occurring subsequent to the date hereof. The
Borrower further acknowledges and agrees that the Lenders' failure to exercise
or delay in exercising such rights and remedies shall not constitute a waiver
thereof or of the Existing Events of Default, or create a course of dealing or
any obligation on the part of the Lenders to forbear from exercising any or all
such rights or remedies at any time in the Lenders' sole discretion, and any
such claims on the part of the Borrower are hereby waived.
4. Representations and Warranties; Confirmation of Representations,
Warranties.
This letter agreement has been duly authorized, executed and delivered
by the Borrower. The Loan Agreement, as amended hereby, each of the other Loan
Documents, as amended by and through the date hereof and all Indebtedness of the
Borrower incurred thereunder, constitute the legal, valid and binding
obligations of the Borrower, enforceable against the Borrower in accordance with
their respective terms. The Borrower, by execution of this letter agreement,
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
(except those that expressly relate to an earlier date) is true and correct as
of the date hereof.
5. Covenants.
Until such time as the Borrower shall have paid its Obligations to the
Lenders in full, the Borrower covenants and agrees with the Lenders that the
Borrower shall comply with all of the terms and conditions contained in the Loan
Documents, including but not limited to the following:
(a) The Budget. The Borrower's weekly financial results shall not
negatively vary from the Budget in any category or in the aggregate.
(b) Reports. In addition to the financial reporting requirements in the
Loan Agreement, the Borrower shall supply the Lenders' with the following
information:
- By 1:00 p.m. each business day, the Borrower shall supply
the Lenders with a (i) a list of disbursements in accordance with
the Budget; and (ii) notice of all notices of default, written or
oral, relating to any of the Borrower's contracts, agreements or
leases;
<PAGE> 4
- On or before December 16, 1999 the Borrower shall supply the
Lenders with a detailed weekly cash budget for the months of
January through March, 2000; and
- All such other information as the Lenders may from time to
time reasonably request;
(c) Examination of Borrower's Books. The Borrower shall permit the
Lenders to examine the Borrower's books on demand, at the Lenders' discretion.
Any such examination shall be at the Borrower's expense;
(d) Financial Crisis Management. The Borrower shall continue to retain
a financial crisis manager from Deloitte Touche LLP or another financial
consulting firm acceptable to the Lenders; and
(e) Storewide Sales; Consultant. On or before December 9, 1999, the
Borrower shall deliver to the Lenders (i) a list of at least 15 stores at which
the Borrower will commence "all items on sale" promotional sales on December 11,
1999, and (ii) an agreement between the Borrower and a third party consultant
engaged by the Borrower to advise the Borrower in connection with the sales
referenced in clause (i) and in the next succeeding sentence; such consultant
and agreement to be satisfactory to the Lenders. On or before December 13, 1999,
the Borrower will present the Lenders with an additional list of stores at which
it will commence "all items on sale" promotional sales as soon as practicable.
(f) Bankruptcy Counsel. The Borrower will engage bankruptcy counsel by
the close of business on December 13, 1999.
(g) Lease Valuation. On or before December 17, 1999, the Company will
deliver to the Lenders an orderly liquidation valuation of the Company's
leasehold interests from a "lender's" perspective, prepared by an independent
third party acceptable to the Lenders.
6. Compliance with Loan Documents.
The Borrower hereby represents and warrants to the Agent and the Lenders
that, other that the Existing Events of Default, all of the conditions precedent
to lending specified in Section 3 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, other than the Existing Events of
Default, 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.
<PAGE> 5
7. Without in any manner limiting the provisions of Section 3 above,
the Borrower acknowledges that the Lenders have informed the Borrower that they
intend to immediately cease making advances and exercise their rights and
remedies under the Loan Documents and applicable law upon the occurrence of any
of the following:
(a) Payment. The Borrower fails to make any payment required to be
made to the Lenders or the Agent under this letter agreement or the Loan
Agreement;
(b) Budget. The Borrower fails to comply with the Budget;
(c) Representations. Any representation or warranty made by, or on
behalf of, the Borrower in this letter agreement or in any certificate or other
document delivered in connection herewith shall prove to have been untrue or
incorrect in any material respect;
(d) Covenants. The Borrower shall fail to fully perform or comply
with any term, covenant or provisions of this letter agreement (including
without limitation those under Section 5 hereof);
(e) Bankruptcy, Etc. The Borrower shall become insolvent or fail to
pay its debts as they mature, or the Borrower shall be adjudicated as bankrupt
or insolvent, or any case or proceeding shall be commenced by or against the
Borrower in bankruptcy or liquidation or for its reorganization or readjustment
of the indebtedness of the Borrower under any applicable bankruptcy or
insolvency laws, or any receiver, administrator, liquidator or trustee or
similar official shall be appointed for the Borrower or any of its property, or
the Borrower shall make an assignment for the benefit of creditors, or any
similar event shall take place with respect to the Borrower or the Borrower
shall sell all or a substantial part of its assets, whether in a single
transaction or a series of transactions;
(f) Material Adverse Change. There shall have occurred any event,
circumstance or condition that the Lenders, in their sole discretion, believe
could cause a Material Adverse Change; or
(g) Loan Documents. There shall have occurred any Event of Default
under or as defined in any of the Loan Documents.
8. Remedies.
The failure of the Lenders to insist upon the strict performance of any
term, condition or other provision hereof or to exercise any right or remedy
hereunder shall not constitute a waiver by the Lenders of any such term,
condition or other provision or Event of Default (including but not limited to
the Existing Events of Default); and any waiver of any such term, condition or
other provision of any such Event of Default shall not affect or alter this
letter agreement or the other Loan Documents, and each and every term, condition
and other provision of this letter agreement and the other Loan Documents
<PAGE> 6
shall, in such event, continue in full force and effect and shall be operative
with respect to any other then existing or subsequent Event of Default.
9. No Novation; Effect; Counterparts; Governing Law.
The Loan Agreement and each of the other Loan Documents shall be
unaffected hereby and shall remain in full force and effect; this letter
agreement 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
letter agreement 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 letter agreement 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
letter agreement and all such expenses shall constitute Lender Group Expenses.
10. Miscellaneous.
The Borrower, by execution hereof, acknowledges and confirms that for
all purposes of the Loan Agreement and the other Loan Documents, the letter
agreement shall be a "Loan Document" and the term "Loan Agreement" shall mean
the Loan Agreement as amended by and through the date of this letter agreement
and as further amended and/or restated from time to time hereafter.
The undersigned Lenders have not waived any terms of the Loan Agreement
and expressly reserve their rights to enforce all provisions of the Loan
Agreement and the other Loan Documents at law, in equity or otherwise. The
undersigned Lenders do not hereby obligate themselves to grant any waiver or
extension at any time in the future.
Please acknowledge your agreement with the foregoing by signing in the
space indicated below.
FOOTHILL CAPITAL CORPORATION,
For itself and as Agent
By:
(Title)
PARAGON CAPITAL, LLC, as a Lender
By:
(Title)
ACKNOWLEDGED AND AGREED
GANTOS, INC.
By:
(Title)
cc: Charles T. Weissman, Esq.
Peter M. Palladino, Esq.
<PAGE> 1
Exhibit 10.1
EXHIBIT C
GANTOS, INC.
1266 EAST MAIN STREET, 5TH FLOOR
STAMFORD, CONNECTICUT 06902
November 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"), the letter agreement, dated May 19, 1998 (the
"First Amendment") and the letter agreement, dated March 16, 1999 (the "Second
Amendment"), with respect to your employment with Gantos, Inc. ("Gantos"). In
connection with your continued employment by Gantos, you and Gantos desire to
provide that your severance payments upon a change in control will equal the
amount that provides you with the greatest after-tax benefits. This letter (the
"Third 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. Change in Control Severance. The final paragraph of Section 6(c) of
the Agreement, as amended, (beginning "Notwithstanding the foregoing, . . . .")
is amended and restated to read as follows:
"Notwithstanding the foregoing, the total amount of all payments of cash
or property in the nature of compensation contingent on a change in the
ownership or effective control of Gantos or in the ownership of a
substantial portion of Gantos' assets, including, without limitation, the
benefits provided pursuant to this Paragraph 6(c) and payments relating to
any stock options that vest as a result of a Change in Control, shall not
exceed whichever of the following provides you with the greatest dollar
value after federal income and excise taxes: (1) the maximum amount that
may be paid to you and not be deemed a "parachute payment" resulting in an
excise tax to you and a loss of compensation deduction to Gantos, all
within the meaning of Section 280G of the Internal Revenue Code of 1986,
as amended, and related provisions, or any successor provisions, and (2)
the amounts payable to you in the absence of this sentence. If the
benefits otherwise provided pursuant to this Paragraph 6(c) would result
in you receiving such a "parachute payment" and clause (1) above is
applicable, your benefits shall be reduced (in the order set forth above)
until they are $1.00 less than the amount that would result in you
receiving such a "parachute payment"."
2. No Other Change. Except as modified by this Third Amendment, the
Agreement, as amended, shall continue in full force according to its terms and
is ratified.
3. Counterparts. This Third Amendment may be signed in counterparts, both
of which together will be deemed an original of this Third Amendment. This Third
Amendment will also be effective if evidenced by signed copies transmitted by
telecopier or facsimile transmission.
<PAGE> 2
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
2
<PAGE> 1
EXHIBIT 10.2
1999 Gantos, Inc. Executive Bonus Plan(1)
1. Definitions. As used in this Executive Bonus Plan, the following terms
have the following meanings:
"Board" is the Board of Directors of Corporation.
"Committee" is the Compensation Committee of the Board or any other
committee appointed by the Board to administer the Plan or, at the
Board's discretion, the Board itself.
"Corporation" is Gantos, Inc., a Michigan corporation, or any
successor thereto.
"Effective Date" is January 31, 1999.
"Fiscal 1999" is Corporation's fiscal year ending January 29, 2000.
"Fiscal 1999 Target" is the Fiscal 1999 Profit target which has been
determined by the Board or the Committee and announced to the
Participants.
"Participant" means any participant in the Plan pursuant to paragraph
3 below.
"Plan" is this Executive Bonus Plan.
"Profit" is Corporation's income
(i) before deductions for (1) federal, state and local
income taxes, (2) extraordinary items, and (3) all bonuses
payable under this Plan, and
(ii) plus or minus any items not included in the projections
from which the Fiscal 1999 Profit was determined and that
otherwise decreased or increased Profit, at the discretion of
the Compensation Committee.
Profit will be determined by Corporation's regular independent public
accountants (1) in accordance with generally accepted accounting
principles and (2) using amounts obtained as part of the annual audit
of Corporation's Fiscal 1999 financial statements.
2. Administration. The Plan will be administered by the Committee.
Subject to the provisions of the Plan, the Committee is authorized to interpret
the Plan, to make, amend and rescind rules and regulations relating to the Plan,
to make bonus awards under the Plan and to make all other determinations
necessary or advisable for its administration. All Plan
- -----------------
(1) Adopted by the Gantos, Inc. Board of Directors on November 16, 1999.
<PAGE> 2
determinations made by the Committee, and the Committee's interpretation and
construction of any provision of the Plan, will be final and conclusive.
3. Participants; Termination of a Participant's Employment.
(a) The initial persons covered by the Plan are Arlene H. Stern,
Dennis Horstman, Thomas J. Villano, Diane Abbate-Fox, Joseph Kuhn, Trudy
Johnson-Chianciola, Vicki Boudreaux and Donna Rustem. The Committee or the
Corporation's Chief Executive Officer will determine and designate from time to
time, in its, his or her discretion, any additional officers hired by the
Corporation during Fiscal 1999 to be covered by the Plan. The Committee will
determine and designate from time to time, in its discretion, any other key
employees of Corporation to be covered by the Plan.
(b) If a Participant's employment with Corporation terminates before
the end of Fiscal 1999 because of such Participant's death or disability, such
Participant will be eligible to receive a bonus under the Plan. If a
Participant's employment with Corporation terminates before the end of Fiscal
1999 for any other reason, such Participant will receive no bonus under the
Plan.
4. Fiscal 1999 Annual Bonus.
(a) If Corporation's Fiscal 1999 Profit exceeds the Fiscal 1999
Target, the Fiscal 1999 cash bonus pool will equal 50% of such excess, up to a
maximum cash bonus pool equal to 35% of the actual salaries of all Participants
in the Plan with respect to services performed in Fiscal 1999 for Corporation
(the "Bonus Pool").
(b) Fifty percent of the Bonus Pool will be automatically earned and
payable upon achievement of Fiscal 1999 Profits in excess of the Fiscal 1999
Target. This 50% portion will be paid to each Participant in proportion to the
1999 base salary actually paid to such Participant. The Committee shall
determine, in its discretion, what portion, if any, of the remaining Bonus Pool
will be payable to each Participant, based on its evaluation of senior
management's recommendations, the individual's achievement of his or her
Performance Plan/Objectives and such other factors as the Committee deems
relevant. The Committee, in its discretion, may determine that all, any portion
or none of the remaining Bonus Pool will be payable to any particular
Participant, and the Committee is not required to award the entire amount of the
remaining Bonus Pool to the Participants. Bonuses will be paid promptly after
the Committee certifies the amount of Fiscal 1999 Profit and the calculation of
the portion of the Bonus Pool automatically payable to each Participant
receiving bonuses under the Plan and makes its decisions regarding the merit
portion of the bonus, if any.
The Board reserves the right to pay bonuses to Participants beyond
those, if any, called for by the Plan.
5. Base Salaries. The Plan does not cover Participants' salaries.
2
<PAGE> 3
6. Stock Options. The Plan does not cover stock option grants, which
will be subject to the Board's discretion.
7. Nontransferability of Rights under the Plan. A Participant's rights
under the Plan may not be transferred, assigned or pledged.
8. Employment Agreement/Continuation of Employment. Nothing contained
in the Plan nor any action taken by the Committee in connection with the Plan
will confer upon any Participant any right to continuation of employment by
Corporation or any subsidiary of Corporation, nor interfere in any way with the
right of Corporation or any subsidiary to terminate such Participant's
employment at any time. Notwithstanding the preceding sentence, nothing in the
Plan affects the rights of any Participant under any written employment
agreement between such Participant and Corporation.
9. Withholding Payments. Participants will be responsible for all taxes
on bonuses awarded to them under the Plan, and Corporation will be entitled to
make all appropriate withholding from amounts due to Participants under the
Plan.
10. Effectiveness of Plan. This Plan becomes effective on the Effective
Date and will remain in effect through the end of Fiscal 1999.
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF GANTOS, INC. AS OF, AND FOR THE NINE-MONTH PERIOD ENDED, OCTOBER
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> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> OCT-30-1999
<CASH> 1,179
<SECURITIES> 0
<RECEIVABLES> 16,885
<ALLOWANCES> 578
<INVENTORY> 36,988
<CURRENT-ASSETS> 64,737
<PP&E> 64,331
<DEPRECIATION> 54,898
<TOTAL-ASSETS> 75,940
<CURRENT-LIABILITIES> 74,205
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 708
<TOTAL-LIABILITY-AND-EQUITY> 75,940
<SALES> 107,284
<TOTAL-REVENUES> 107,284
<CGS> 88,265
<TOTAL-COSTS> 88,265
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,994
<INCOME-PRETAX> (8,894)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,894)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,894)
<EPS-BASIC> (3.35)
<EPS-DILUTED> (3.35)
</TABLE>
