GANTOS INC, PRE 14A, 1999-05-07

GANTOS INC
PRE 14A, 1999-05-07
WOMEN'S CLOTHING STORES

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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )

Filed by the Registrant /X/
Filed by a Party other than the Registrant / /

Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12

GANTOS, INC.
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(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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PRELIMINARY COPIES

GANTOS, INC.
1266 EAST MAIN STREET, FIFTH FLOOR
STAMFORD, CONNECTICUT 06902

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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

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<CAPTION>
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ITEM I. To elect two directors to serve until the 2001 Annual Meeting of Shareholders and until
their successors are elected and qualified and to elect two directors to serve until
the 2002 Annual Meeting of Shareholders and until their successors are elected and
qualified; and

ITEM II. To consider and act upon a proposal to amend and restate the Company's Restated
Articles of Incorporation to effect a one-for-three reverse stock split of the
Company's Common Shares while keeping 20,000,000 authorized Common Shares, at a par
value of $0.01.

ITEM III. To transact such other business as may properly come before the Annual Meeting.
</TABLE>

The Board of Directors has set the close of business on May 4, 1999 as the
record date for determining shareholders entitled to notice of, and to vote at,
the Annual Meeting.

All shareholders are cordially invited to attend the Annual Meeting.

By Order of the Board of Directors

Arlene H. Stern
PRESIDENT AND CHIEF EXECUTIVE OFFICER

May 19, 1999

IT IS IMPORTANT THAT THE ENCLOSED PROXY CARD BE SIGNED, DATED AND PROMPTLY
RETURNED IN THE ENCLOSED ENVELOPE, SO THAT YOUR SHARES WILL BE REPRESENTED
WHETHER OR NOT YOU ATTEND THE ANNUAL MEETING.
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GANTOS, INC.
1266 EAST MAIN STREET, FIFTH FLOOR
STAMFORD, CONNECTICUT 06902

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PROXY STATEMENT
FOR THE 1999 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 22, 1999

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GENERAL INFORMATION

The Annual Meeting of Shareholders of Gantos, Inc. (the "Company") will be
held at the Holiday Inn Select, Stamford #1 room, 700 Main Street, Stamford,
Connecticut 06901, on Tuesday, June 22, 1999, at 11:00 a.m., Eastern Daylight
Time, for the purposes set forth in the accompanying Notice of Annual Meeting of
Shareholders. The approximate mailing date for this proxy statement and proxy is
May 19, 1999.

It is important that your shares be represented at the meeting. If it is
impossible for you to attend the meeting, please sign and date the enclosed
proxy and return it to the Company. Shares represented by valid, executed and
dated proxies in the enclosed form will be voted if received in time for the
Annual Meeting in accordance with the instructions thereon. Unless your proxy is
otherwise marked, it will be voted FOR management's nominees for the Board of
Directors and FOR the proposed one-for-three reverse stock split and related
amendments and will be voted at the discretion of the proxy holder in respect of
such other business, if any, as may properly be brought before the Annual
Meeting. Any person giving a proxy has the power to revoke it any time before it
is voted by executing a later dated proxy, by subsequent written notice to the
Company or by attendance and voting at the meeting. The proxy is solicited by
the Board of Directors of the Company and such solicitation may include requests
by mail, telegram and personal contact by its directors, officers and employees,
at no additional compensation. The Company has also engaged Kissel-Blake, a
division of Shareholder Communications Corporation, to solicit proxies by mail
or telephone or in person, at a cost to the Company of $5,000 plus reimbursement
of out-of-pocket expenses. All expenses in connection with the solicitation of
proxies, including the costs of preparing and mailing the proxy materials, will
be borne by the Company. The Company will reimburse brokers or other nominees
for their expenses in forwarding proxy materials to principals.

As used in this Proxy Statement, 1996, 1997 and 1998 shall mean the fiscal
years ended February 1, 1997, January 31, 1998 and January 30, 1999,
respectively. Subsequent years shall mean the fiscal year ended on the Saturday
closest to January 31.

VOTING SECURITIES AND PRINCIPAL HOLDERS

Only holders of record of Common Shares, $.01 par value ("Common Stock"), at
the close of business on May 4, 1999 (the "Record Date") are entitled to notice
of, and to vote at, the meeting or any adjournment or adjournments of the
meeting, each share having one vote on each matter submitted for a vote at the
meeting. On the Record Date, the Company had issued and outstanding 7,819,526
shares of Common Stock.

As of the Record Date, no person was known to the Company to beneficially
own more than 5% of the Company's outstanding Common Stock, its only outstanding
class of voting shares.

ITEM I. ELECTION OF DIRECTORS

The Board of Directors proposes that the two persons named below as nominees
for election as directors until the 2001 Annual Meeting be elected as directors
of the Company to hold office until the Annual Meeting of Shareholders to be
held in the year 2001, and until their successors are duly elected and
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qualified or until their earlier death, resignation or removal, and that the two
persons named below as nominees for election as directors until the 2002 Annual
Meeting be elected as directors of the Company to hold office until the Annual
Meeting of Shareholders to be held in the year 2002, and until their successors
are duly elected and qualified or until their earlier death, resignation or
removal. Mr. Gantos was elected as a director at the 1992 Annual Meeting of
Shareholders on June 18, 1992, Ms. Strasser was appointed as a director pursuant
to the Company's Plan of Reorganization effective March 31, 1995, and Ms.
Eveillard and Ms. Putnam were elected as directors at the 1996 Annual Meeting of
Shareholders on June 20, 1996. Ms. Burton is not standing for reelection after
her terms expires at the Annual Meeting, and the Board has determined to
decrease the size of the Board to seven members effective June 22, 1999. If a
quorum is present, the two nominees to serve until the 2001 Annual Meeting and
the two nominees to serve until the 2002 Annual Meeting receiving the greatest
number of votes cast at the meeting or its adjournment will be elected. Withheld
votes and broker non-votes will not be deemed votes cast in determining which
nominees receive the greatest number of votes cast, but they will be counted in
determining whether a quorum is present. The persons named in the accompanying
proxy intend to vote all valid proxies received by them for the election of
these nominees, who have consented to serve if elected, unless the giver of the
proxy withholds authority to vote for any such nominee. If any nominee is unable
or declines to serve, which is not expected, it is intended that the proxies be
voted in accordance with the best judgment of the proxy holders for another
qualified person.

The following information is furnished as of the Record Date with respect to
each nominee for election as a director, with respect to each person whose term
of office as a director will continue after the meeting, with respect to each
present or former executive officer of the Company named in the Summary
Compensation Table below, and with respect to all current directors and
executive officers as a group:

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PERCENTAGE OF
SHARES OF OUTSTANDING
COMMON STOCK COMMON STOCK OF
OF THE COMPANY THE COMPANY
BENEFICIALLY BENEFICIALLY
NAME AND YEAR FIRST BECAME A DIRECTOR AGE OWNED(A) OWNED
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NOMINEES FOR ELECTION AS DIRECTORS UNTIL THE 2001 ANNUAL MEETING

L. Douglas Gantos (1961).................................................. 67 266,334(b) 3.3%
Hannah H. Strasser (1995)................................................. 39 245,803(c) 3.1%

NOMINEES FOR ELECTION AS DIRECTORS UNTIL THE 2002 ANNUAL MEETING

Elizabeth M. Eveillard (1992)............................................. 52 25,500(d) *
S. Amanda Putnam (1995)................................................... 49 9,000(e) *

DIRECTORS CONTINUING IN OFFICE

Arlene H. Stern (1996).................................................... 48 371,098(f) 4.6%
Fred K. Schomer (1992).................................................... 59 25,700(g) *
Erwin A. Marks (1995)..................................................... 61 9,000(h) *
</TABLE>

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OTHER EXECUTIVE OFFICERS

Dennis Horstman........................................................... 41,924(i) *
Neal Gottfried............................................................ 17,000(j) *
Vicki Boudreaux........................................................... 7,000(k) *
Joseph Giudice............................................................ 26,752(l) *
Hope Grey................................................................. 4,225(m) *
All directors and executive officers as a group (12 persons).............. 1,018,359(n) 12.1%
</TABLE>

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* Less than 1%.

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(a) All directors, nominees and executive officers named in this proxy statement
have sole investment and voting power with respect to shares of Common Stock
beneficially owned by them, except as provided below.

(b) Includes 233,000 shares that Mr. Gantos has the right to acquire within 60
days of the Record Date pursuant to options granted to him under the
Company's stock option plans.

(c) Includes 9,000 shares that Ms. Strasser has the right to acquire within 60
days of the Record Date pursuant to options granted to her under the
Company's Amended and Restated Director Stock Option Plan. In addition, the
information includes 11,315 shares held in investment advisory accounts over
which Ms. Strasser has voting and investment discretion and 225,488 shares
held by Cardinal Recovery Partners. Cardinal Capital Management LLC is a 1%
general partner in Cardinal Recovery Partners and Ms. Strasser is a 45%
general partner in Cardinal Capital Management. Ms. Strasser disclaims
beneficial ownership of the shares held by Cardinal Recovery Partners.

(d) Includes 15,000 shares that Ms. Eveillard has the right to acquire within 60
days of the Record Date pursuant to options granted to her under the
Company's Amended and Restated Director Stock Option Plan.

(e) Includes 9,000 shares that Ms. Putnam has the right to acquire within 60
days of the Record Date pursuant to options granted to her under the
Company's Amended and Restated Director Stock Option Plan.

(f) Includes 42,765 shares acquired under the Gantos, Inc. Employee Stock
Purchase Plan between January 31, 1997 and April 30, 1999, and 253,333
shares that Ms. Stern has the right to acquire within 60 days of the Record
Date pursuant to options granted to her under the Company's stock option
plans.

(g) Includes 15,000 shares that Mr. Schomer has the right to acquire within 60
days of the Record Date pursuant to options granted to him under the
Company's Amended and Restated Director Stock Option Plan. In addition, the
information includes 10,700 shares Mr. Schomer owns jointly with his wife.

(h) Includes 9,000 shares that Mr. Marks has the right to acquire within 60 days
of the Record Date pursuant to options granted to him under the Company's
Amended and Restated Director Stock Option Plan.

(i) Includes 24,000 shares that Mr. Horstman has the right to acquire within 60
days of the Record Date pursuant to options granted to him under the
Company's stock option plans. In addition, the information includes 8,000
shares held jointly with his wife and 9,924 shares acquired under the
Gantos, Inc. Employee Stock Purchase Plan between August 1, 1997 and April
30, 1999.

(j) Includes 12,000 shares that Mr. Gottfried has the right to acquire within 60
days of the Record Date pursuant to options granted to him under the
Company's stock option plans.

(k) Includes 7,000 shares that Ms. Boudreaux has the right to acquire within 60
days of the Record Date pursuant to options granted to her under the
Company's stock option plans.

(l) Includes 15,250 shares that Mr. Giudice owns jointly with his wife and
11,502 shares acquired under the Gantos, Inc. Employee Stock Purchase Plan
between August 1, 1997 and April 30, 1999. Mr. Giudice resigned as an
executive officer as of September 25, 1998.

(m) Includes 4,225 shares acquired under the Gantos, Inc. Employee Stock
Purchase Plan between November 1, 1996 and April 30, 1999. Ms. Grey resigned
as an executive officer as of September 14, 1998.

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(n) Includes 586,333 shares that the Company's directors and executive officers
have the right to acquire within 60 days of the Record Date pursuant to
options granted to them under the Company's stock option plans.

OTHER INFORMATION RELATING TO DIRECTORS

Following is a brief account of the business experience during the past five
years of each nominee for the Board of Directors of the Company and each
continuing director of the Company:

NOMINEES FOR TERMS TO EXPIRE IN 2001
CLASS III

L. DOUGLAS GANTOS

L. Douglas Gantos served as the Company's Chairperson of the Board from
September 1996 to May 1998 and has served as a consultant to the Company since
May 1998. From July 1996 until September 1996, he served as the Company's Chief
Executive Officer and Chairperson of the Board. From August 1993 until July
1996, Mr. Gantos served as the Company's President, Chief Executive Officer and
Chairperson of the Board. From April 1992 until August 1993 he served as the
Company's Chief Executive Officer and Chairperson of the Board. From April 1963
until April 1992, Mr. Gantos served as the Company's President and Chief
Executive Officer. While Mr. Gantos receives cash payments pursuant to a letter
of employment, as amended (see "Executive Compensation--Employment Contracts and
Termination of Employment and Change-in-Control Arrangements--L. Douglas
Gantos"), he will serve as a director of the Company during any period in which
the Company's Board of Directors desires him to serve as a director, unless he
is not elected by the shareholders or dies.

HANNAH H. STRASSER

Hannah H. Strasser is co-head of the high yield group, responsible for
portfolio management and research for Cardinal Capital Management, a money
management company Ms. Strasser co-founded in April 1995. Prior to co-founding
Cardinal, Ms. Strasser was co-head of the high yield group and was responsible
for portfolio management and research for Deltec Asset Management Corp, a money
management firm. She was also a Managing Director and a member of Deltec's
Executive Committee. She currently serves as a member of the Board of Directors
of Rymer Foods Inc.

NOMINEES FOR TERMS TO EXPIRE IN 2002
CLASS I

ELIZABETH M. EVEILLARD

Elizabeth M. Eveillard has been the Managing Director and head of the
Retailing Industry Group for PaineWebber Incorporated, an investment banking
firm, since April 1988. Ms. Eveillard currently serves as a member of the Board
of Directors of Lillian Vernon Corporation, a specialty catalog retailer.

S. AMANDA PUTNAM

S. Amanda Putnam has been the Vice President, Marketing Strategies for
Fitch, Inc., which is an international business and design consulting
organization, since 1992.

CONTINUING DIRECTORS WHOSE TERMS EXPIRE IN 2000
CLASS II

ARLENE H. STERN

Arlene H. Stern has been the Company's President and Chief Executive Officer
since September 8, 1996. From July 8, 1996 to September 8, 1996, Ms. Stern was
the President and Chief Operating Officer for

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the Company. Ms. Stern served as Executive Vice President and Chief Operating
Officer of Casual Corner Group, Inc., a retail apparel specialty store chain and
a division of U.S. Shoe Corporation, from July 1993 to August 1995. While Ms.
Stern is employed by the Company, the Company will nominate her and use its
reasonable efforts to have her elected as a director of the Company (see
"Executive Compensation-- Employment Contracts and Termination of Employment and
Change-in-Control Arrangements-- Arlene H. Stern").

FRED K. SCHOMER

Fred Schomer has been a Partner in Strategic Solutions Partners since
January 1, 1998 and is also a private investor. Mr. Schomer was the Executive
Vice President and Chief Financial Officer for Gerber Products Company, a
consumer products manufacturer, from November 1988 until his retirement in
December 1997.

ERWIN A. MARKS

Erwin A. Marks has been the President of Marks & Associates, Inc., an
interim management and consulting firm specializing in underperforming companies
and restructurings, since April 1996. From June 1995 to April 1996, Mr. Marks
was the President of Circle Fine Arts Corporation, a retail art gallery chain.
From 1989 to June 1995, Mr. Marks was the Managing Director and Senior Vice
President of Heller Investments, Inc., a subsidiary of Heller Financial Inc., a
financial services company. Circle Fine Arts Corporation filed a voluntary
petition for relief under Chapter 11 of the United Stated Bankruptcy Code on
February 8, 1996. Mr. Marks was an executive officer of Circle Fine Arts
Corporation at the time of the filing.

CERTAIN INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES THEREOF

The Board of Directors of the Company has established an Audit Committee.
The current members of the Audit Committee are Elizabeth M. Eveillard,
Chairperson, Mary Elizabeth Burton and Erwin A. Marks. The Audit Committee is
responsible for (1) nominating the Company's independent accountants for
approval by the Board of Directors, (2) reviewing with the independent
accountants the scope, cost and results of the auditing engagement, (3)
reviewing and approving fees for professional services provided by the
independent accountants, (4) reviewing the reports submitted by the independent
accountants, and (5) reviewing the adequacy of the Company's system of internal
accounting controls. During 1998, the Audit Committee held one meeting.

The Board of Directors has established a Compensation Committee. The current
members of the Compensation Committee are Fred K. Schomer, Chairperson, S.
Amanda Putnam and Hannah H. Strasser. The Compensation Committee is responsible
for recommending to the Board of Directors compensation plans and arrangements
for senior management and directors and for administering the Company's
Executive Bonus Plan, Stock Option Plans and Employee Stock Purchase Plan.
During 1998, the Compensation Committee held three meetings.

The Board of Directors has established an Executive Committee. The current
members of the Executive Committee are L. Douglas Gantos, Chairperson, Hannah H.
Strasser and Fred K. Schomer. The Executive Committee is permitted to exercise
all of the powers and authority of the Board of Directors in the management of
the business and affairs of the Company between meetings of the Board of
Directors, except as limited by the Michigan Business Corporation Act and the
Company's Bylaws. During 1998, the Executive Committee did not meet.

During 1998, the Board of Directors held 12 meetings and took action by
written consent on four occasions. Each director of the Company attended at
least 75% of the aggregate of (i) the total number of meetings of the Board of
Directors (held during the period for which he or she has been a director), and
(ii) the total number of meetings held by all committees of the Board on which
he or she served (during

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the periods that he or she served). The Board of Directors does not have any
standing nominating committee.

EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

Under the Company's standard arrangements, each director who is not a
Company employee receives an annual fee of $15,000, payable quarterly, plus $500
for each Board meeting attended, including meetings by conference telephone
call, plus reasonable expenses.

Pursuant to the Gantos, Inc. Amended and Restated Director Stock Option Plan
(the "Directors Plan"), on April 1 each year, the Company automatically grants
an option to purchase 1,000 of the Company's common shares to each director of
the Company who (i) is a director of the Company as of the date the option is
granted under the Directors Plan, (ii) has served as a director of the Company
for at least nine months as of the date the option is granted under the
Directors Plan, and (iii) is not an officer or employee of the Company. Up to
100,000 common shares are reserved for issuance under the Directors Plan.

Options are exercisable on the date of grant and expire ten years
thereafter. The option exercise price is the fair market value of the common
shares on the date of grant. Options may be exercised either by payment in cash
or, at the discretion of the Board of Directors, (i) by surrender of common
shares of the Company, or (ii) by a promissory note, or (iii) by delivery of the
proceeds from a broker's sale of, or loan secured by, some or all of the shares
received upon exercise of the option. No options may be granted under the
Directors Plan after March 16, 2002.

On April 1, 1998 6,000 options to purchase common shares were granted under
the Directors Plan at an exercise price of $0.359375. On April 1, 1999 7,000
options to purchase common shares were granted under the Directors Plan at an
exercise price of $0.8125. As of the Record Date, options to purchase 33,000
common shares remain authorized for future award under the Directors Plan.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

GENERAL. The Compensation Committee's overall compensation policy
applicable to the Company's executive officers is to provide a compensation
package that is intended to attract and retain qualified executives for the
Company and to provide them with incentives to achieve Company goals and
increase shareholder value. The Compensation Committee implements this policy
through salaries, bonuses, stock options, restricted stock awards, retirement
savings plans, employment and severance agreements and miscellaneous personal
benefits.

SALARIES. The Compensation Committee's policy is to provide salaries that
are comparable, in its subjective judgement, to those of similar executive
officers in similar companies in order to attract and retain qualified
executives and that compensate employees for their individual contributions and
performance. The Committee also considers management's recommendations. The
Compensation Committee determines comparable salaries through Company research
regarding what is paid by other companies deemed comparable to the Company in
terms of size and/or business (adjusted for the size of the Company and the
experience and responsibility of the executive), through the salary requests of
the individuals interviewed by the Company for open positions and through
recommendations of executive search firms hired by the Company to locate
executive officers.

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BONUSES. The Compensation Committee's policy is to adopt a bonus plan that
compensates executive officers for achieving the Company's earnings target set
near the beginning of the fiscal year and for their individual performance
during the year. The Compensation Committee also reserves the right to recommend
discretionary bonuses for the Company's executive officers based on its
subjective evaluation of management's recommendations, the Company's performance
and achievements and their individual performance and achievements during the
year even if the Company's earnings target is not met. These bonuses are
intended to make a significant portion of each executive officer's compensation
dependent on the Company's performance and to provide executive officers with
incentives to achieve Company goals, increase shareholder value and work as a
team. Bonuses are also intended to recognize the executive's individual
contributions to the Company.

For the fiscal year ended January 30, 1999, the 1998 Gantos, Inc. Executive
Bonus Plan (the "1998 Plan") was administered by the Company's Compensation
Committee and covered all of the executive officers of the Company named in the
Summary Compensation Table below, along with certain other key members of
management. Pursuant to the 1998 Plan, the 1998 bonus pool equaled 50% of the
Company's earnings in excess of the earnings target, up to a maximum pool of 35%
of the actual salaries of the plan participants. The 1998 Plan provided for 50%
of the bonus pool to be automatically earned and payable upon the achievement of
earnings in excess of the earnings target and to be automatically allocated
among the participants in proportion to the actual salary paid to the
participants. The Compensation Committee was to determine, in its discretion,
what portion, if any, of the remaining bonus pool would be paid to each
participant, based on its evaluation of senior management's recommendations, the
individual's performance and other factors as the Committee deemed relevant. The
Compensation Committee was not required to award the entire remaining bonus pool
and any participant could receive any amount of the remaining bonus pool. For
purposes of the 1998 Plan, earnings were defined as the Company's income before
taxes, extraordinary items, and bonuses payable under this plan plus or minus
any items not included in projections from which the earnings target was
determined and that otherwise increased or decreased earnings, at the discretion
of the Compensation Committee.

The earnings target was set by the Board of Directors after consultation
with senior management and receiving the recommendation of the Compensation
Committee, and it was higher than 1997 earnings. The Board reserved the right to
pay bonuses beyond those, if any, called for by the 1998 Plan. As a result of
the Company's 1998 earnings not meeting target, no bonuses were payable under
the 1998 Plan. For 1998, one contractually obligated bonus was paid to Arlene H.
Stern in the amount of $75,000.

STOCK OPTIONS AND RESTRICTED STOCK. The Compensation Committee's policy is
to award stock options and restricted stock to the Company's executive officers
in amounts reflecting the Compensation Committee's subjective evaluation of the
participant's position and ability to influence the Company's overall
performance and management's recommendations without any specific weight being
given to any of these factors. In determining the size of the individual awards
of options, the Compensation Committee also considers the amounts of options
outstanding and previously granted both in the aggregate and with respect to the
optionee, the amount of options remaining available for grant under the stock
option plans, and the aggregate amount of current awards, and for new officers,
the amount necessary to attract the officer to the Company and options held by
others at similar levels in the Company. Awards in 1997 consisted of stock
option grants with exercise prices equal to the fair market value of the
Company's common shares on the grant date. Options and restricted stock are
intended to provide participants with an increased incentive to make
contributions to the long-term performance and growth of the Company, to join
the interests of participants with the interests of shareholders of the Company,
to secure for the Company the benefits of the additional incentive inherent in
the ownership of its Common Stock by key employees of the Company and to help
the Company attract and retain qualified employees.

The Compensation Committee's policy is to grant options with a term of ten
years to provide a long-term incentive and to fix the exercise price of the
options at the fair market value of the underlying shares on the date of grant.
Such options only provide compensation if the price of the underlying shares

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increases. In addition, the Compensation Committee's policy is to grant options
that vest over a specified period (generally five years for options granted to
executive officers in 1998) to provide the executive with an incentive to remain
with the Company. The Compensation Committee's policy is also to provide new
executives with options to attract them to the Company.

Generally, the Compensation Committee reserves the right to recommend the
payment of compensation to the Company's executives in amounts it deems
appropriate regardless of whether such compensation is deductible for federal
income tax purposes.

401(k) PLAN. The Company has adopted a 401(k) plan to provide all eligible
employees a means to accumulate retirement savings. Participants may defer
specified portions of their compensation. The 401(k) Plan provides for the
Company to make matching contributions to employee accounts where the employee
participates in the 401(k) plan.

EMPLOYEE STOCK PURCHASE PLAN. The Company has adopted an Employee Stock
Purchase Plan to provide all eligible employees the opportunity to purchase and
hold common shares of the Company. The shares are offered to the employees at a
15% discount.

EMPLOYMENT AND SEVERANCE AGREEMENTS AND MISCELLANEOUS PERSONAL
BENEFITS. The Compensation Committee's policy is to have employment agreements
with new executive officers to provide them with specified positions, periods of
employment, salaries, fringe benefits and severance benefits. The Compensation
Committee's policy is also to have severance agreements with selected key
employees. These benefits are intended to permit the executive officer to focus
his or her attention on performing his or her duties to the Company, rather than
on the security of his or her employment, and to provide the officer with
benefits deemed by the Compensation Committee to be suitable for the executive's
office. The Compensation Committee's policy, however, is that personal benefits
(other than severance pay) should not exceed 10% of the executive's salary and
bonus for the year.

1998 COMPENSATION DECISIONS REGARDING ARLENE H. STERN. Ms. Stern's 1998
salary was not increased from her 1997 salary based on management's
recommendation and the Committee's subjective evaluation of chief executive
officer salaries at similar companies (adjusted in the Committee's subject
judgement for differences in the Company's size and Ms. Stern's experience and
responsibility). Ms. Stern received her contractually required minimum $75,000
bonus for 1998 because the earnings target under the 1998 Plan was not met and
as a result of the Company's 1998 results of operations.

As described in "Stock Options and Restricted Stock", no options were
granted to Ms. Stern in fiscal 1998 based on the Compensation Committee's
subjective evaluation of the then pending merger negotiations and the potential
termination of Ms. Stern's employment after the merger, previous grants to Ms.
Stern and others, management's recommendations, her position and ability to
influence the Company's overall performance, the aggregate amount of the
proposed grants and the shares remaining available under the Company's stock
option plan.

The Compensation Committee also recommended that the Company enter into a
Termination Agreement with Ms. Stern in connection with, and subject to the
consummation of, the proposed merger that was terminated in November 1998. The
Compensation Committee recommended approval of this amendment based on its
subjective judgement of the provisions required to consummate the proposed
merger and retain Ms. Stern's services during the transition period.

By The Compensation Committee

Fred K. Schomer
S. Amanda Putnam
Hannah H. Strasser

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SUMMARY COMPENSATION TABLE

The following table sets forth information for each of the fiscal years
ended January 30, 1999, January 31, 1998 and February 1, 1997 concerning the
compensation of (i) any person serving as the Company's Chief Executive Officer
during the fiscal year ended January 30, 1999, (ii) each of the Company's other
most highly compensated executive officers who were serving as executive
officers as of January 30, 1999 and whose total annual salary and bonus exceeded
$100,000, and (iii) up to two additional executive officers whose total annual
salary and bonus exceeded $100,000 for the fiscal year ended January 30, 1999
and who were not serving as executive officers as of January 30, 1999:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) OPTIONS(#) ($)(8)
- ---------------------------------------- ---- ---------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Arlene H. Stern, ....................... 1998 425,000 75,000 0 0 3,100
President, Chief Executive 1997 425,000 0 2,384 50,000 2,975
Officer and Director 1996 245,193(1) 75,000 5,949 350,000 14,260

Dennis Horstman, ....................... 1998 300,000 0 0 15,000 2,201
Senior Vice President, 1997 300,000 52,500 11,321 20,000 1,306
Merchandising and Marketing 1996 51,923(2) 0 33,123 35,000 0

Neal Gottfried, ........................
Senior Vice President, 1998 225,000 0 9,618 10,000 2,086
Store Operations and 1997 177,404 0 8,439 25,000 805
Visual Merchandising 1996 N/A(3) N/A N/A N/A N/A

Vicki Boudreaux, ....................... 1998 120,000 0 0 5,000 175
Vice President, Planning 1997 120,000 0 5,227 5,000 149
and Allocation 1996 47,181(4) 0 17,388 10,000 36

Joseph Giudice, ........................
Senior Vice President, 1998 146,096(5) 0 0 15,000(6) 1,826
Merchandise Planning and 1997 225,000 0 9,193 15,000(6) 2,029
Operations 1996 86,538(5) 0 25,912 25,000(6) 106

Hope Grey, ............................. 1998 77,918 0 0 5,000(6) 613
Vice President, Technical 1997 120,000 0 2,843 5,000(6) 156
Product Management 1996 39,231(7) 0 0 10,000(6) 46
</TABLE>

- --------------------------

(1) Ms. Stern became an executive officer of the Company on July 8, 1996. The
amounts disclosed include all compensation paid by the Company to Ms. Stern
during 1998, 1997 and 1996.

(2) Mr. Horstman became an executive officer of the Company on December 2, 1996.
The amounts disclosed include all compensation paid by the Company to Mr.
Horstman during 1998, 1997 and 1996.

(3) Mr. Gottfried became an executive officer of the Company on April 14, 1997.
The amounts disclosed include all compensation paid by the Company to Mr.
Gottfried during 1998 and 1997.

(4) Ms. Boudreaux became an executive officer of the Company on September 16,
1996. The amounts disclosed include all compensation paid by the Company to
Ms. Boudreaux during 1998, 1997 and 1996.

(5) Mr. Giudice became an executive officer of the Company on September 16,
1996. The amounts disclosed include all compensation paid by the Company to
Mr. Giudice during 1998, 1997 and 1996. Mr. Giudice resigned as an executive
officer of the Company as of September 25, 1998.

(6) Pursuant to such executive officer's resignation, all outstanding stock
options were canceled.

(7) Ms. Grey became an executive officer of the Company on September 30, 1996.
The amounts disclosed include all compensation paid by the Company to Ms.
Grey during 1998, 1997 and 1996. Ms. Grey resigned as an executive officer
of the Company as of September 14, 1998.

9
<PAGE>
(8) The amounts shown for 1998 include (i) $1,600, $1,600, $1,512, $0, $1,453
and $439 for Ms. Stern, Mr. Horstman, Mr. Gottfried, Ms. Boudreaux, Mr.
Giudice and Ms. Grey, respectively, representing the Company's contribution
to the executive officer in 1998 under the Company's 401(k) Plan, and (ii)
$1,500, $601, $574, $175, $373 and $174 for Ms. Stern, Mr. Horstman, Mr.
Gottfried, Ms. Boudreaux, Mr. Giudice and Ms. Grey, respectively,
representing life insurance premiums paid by the Company in 1998 for policy
values in excess of $50,000.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended January 30, 1999, to each of the
executive officers of the Company named in its Summary Compensation Table above:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ----------------------------------------- ----------- --------------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Arlene H. Stern.......................... 0 0.0% $ 0.90625 5/19/08 $ 0 $ 0
Dennis Horstman.......................... 15,000 11.5% $ 0.90625 5/19/08 $ 8,549 $ 21,665
Neal Gottfried........................... 10,000 7.7% $ 0.90625 5/19/08 $ 5,699 $ 14,443
Vicki Boudreaux.......................... 5,000 3.8% $ 0.90625 5/19/08 $ 2,850 $ 7,222
Joseph Giudice........................... 15,000 11.5% $ 0.90625 5/19/08 $ 8,549 $ 21,665
Hope Grey................................ 5,000 3.8% $ 0.90625 5/19/08 $ 2,850 $ 7,222
</TABLE>

Each of these options becomes exercisable in one-fifth cumulative annual
increments beginning May 19, 1999. Pursuant to the stock option plan under which
these options were granted, if upon the exercise of these options the Company
must pay any amount for income tax withholding, in the Compensation Committee's
sole discretion, either the Company will appropriately reduce the amount of
stock to be delivered to the optionee or the optionee will pay such amount to
the Company to reimburse the Company for such income tax withholding. Also
pursuant to the stock option plans, the Compensation Committee may accelerate
the exercisability of stock options and stock appreciation rights in connection
with termination of a participant's employment or a change in control of the
Company.

10
<PAGE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE

The following table sets forth information concerning each exercise of stock
options during the fiscal year ended January 30, 1999 by each of the executive
officers named in the Summary Compensation Table above and the value of
unexercised options held by such persons as of January 30, 1999:

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END(#) AT FY-END($)
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE
- -------------------------------------------- ----------------- ----------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Arlene H. Stern............................. 0 0 243,333/156,667 0/0
Dennis Horstman............................. 0 0 18,000/47,000 0/3,438
Neal Gottfried.............................. 0 0 5,000/30,000 0/3,438
Vicki Boudreaux............................. 0 0 5,000/15,000 0/1,719
Joseph Giudice.............................. 0 0 0/0 0/0
Hope Grey................................... 0 0 0/0 0/0
</TABLE>

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

ARLENE H. STERN. The Company has a letter of employment, dated as of June
20, 1996, as amended, with Arlene H. Stern. Pursuant to Ms. Stern's employment
letter she is employed as the Company's President and Chief Executive Officer
until July 8, 2000 (the "Term"), unless earlier terminated.

Ms. Stern will receive (i) a salary of $425,000, subject to increase in the
discretion of the Compensation Committee, (ii) the right to participate in the
Company's Executive Bonus Plan, (iii) a minimum bonus of $75,000 with respect to
each of 1996, 1997, 1998 and 1999 (if employed at the end of each applicable
year), except that she waived her right to such bonus for 1997, (iv) a grant of
an option to purchase 350,000 common shares, which was granted as of July 8,
1996, (v) a $750 a month car allowance, (vi) life insurance in the amount of
twice the amount of her base salary, as long as she is insurable at standard
rates, (vi) fringe benefits generally available to other executive officers of
the Company, (vii) reimbursement for various relocation expenses, and (viii)
reimbursement for the difference between the cost of her Simsbury, Connecticut
home and the net proceeds of its sale, up to $250,000 of reimbursement, if such
home is sold before July 8, 2000.

Ms. Stern will also receive termination benefits, which vary depending on
the reason for her termination. If Ms. Stern's employment is terminated before
July 8, 2000 by the Company without "Cause", other than because of her death or
disability, or by Ms. Stern for "Good Reason", she will be entitled to (i) her
salary through the date of termination, (ii) any bonus earned with respect to
the prior fiscal year and a pro rata bonus for the fiscal year in which the
termination occurs, (iii) payment for the pro rata portion of her unused
vacation time for the fiscal year in which the termination occurs, (iv) a
continuation of her salary and minimum bonus for one year after the date of
termination (the "Period"), (v) during the Period, the same medical long-term
disability, dental and prescription drug coverage generally available to other
Company executive officers and her life insurance policy, (vi) the options
granted to her pursuant to the letter agreement fully vesting and remaining
exercisable for 90 days after such termination, and (vii) her life insurance
policy being assigned to her at the end of the Period, if assignable and if she
pays the Company the cash surrender value of the policy. These termination
benefits are subject to Ms. Stern's obligation to seek other employment and the
Company's right to offset amounts paid to Ms. Stern from such other employment
during the severance period.

11
<PAGE>
If a change in control occurs before July 8, 2000 and within two years after
the change in control Ms. Stern's employment is terminated without "Cause",
other than because of her death or disability, or she terminates her employment
for "Good Reason", she will be entitled to the same types of benefits described
in the preceding paragraph, except that (i) all cash payments would be payable
in a lump sum within 30 days after such termination, (ii) the Period would
continue for three years after the date of termination, (iii) the total amount
of compensation contingent on a change in the ownership or effective control of
the Company would be limited to the maximum amount that may be paid to her and
not be deemed a "parachute payment" resulting in an excise tax to her and loss
of compensation deduction to the Company, and (iv) Ms. Stern would not have any
mitigation obligations.

If Ms. Stern's employment is terminated before July 8, 2000 because of her
death or disability, she will be entitled to (i) her salary through the date of
termination, (ii) any bonus earned with respect to the prior fiscal year and a
pro rata bonus for the fiscal year in which the termination occurs, (iii)
payment for the pro rata portion of her unused vacation time for the fiscal year
in which the termination occurs, (iv) for one year after the date of
termination, the same medical, dental and prescription drug coverage generally
available to other Company executive officers and, if such termination is not
the result of her death, her life insurance policy, (v) the options granted to
her pursuant to the letter agreement fully vesting and remaining exercisable for
one year after such termination, (vi) if such termination is not the result of
her death, her life insurance policy would be assigned to her one year after the
date of such termination, if assignable and if she pays the Company the cash
surrender value of the policy, and (vii) receipt of the benefits under any
disability or life insurance policy covering her.

If Ms. Stern's employment is terminated before July 8, 2000 by the Company
for "Cause" or by Ms. Stern without "Good Reason", she will be entitled to (i)
her salary through the date of termination, and (ii) any bonus earned with
respect to the prior fiscal year. She would also be required to reimburse the
Company for a pro rata portion of her relocation expenses paid by the Company.

The termination benefits described above are Ms. Stern's exclusive rights
with respect to termination of her employment. For purposes of Ms. Stern's
employment letter, "Cause" generally means (i) her continued failure to either
devote substantially full time to her employment duties (except because of
illness or disability) or make a good faith effort to perform her employment
duties, (ii) any willful act or omission that she knew or had reason to know
would materially injure the Company, (iii) breach of the non-competition,
confidentiality and non-solicitation provisions of the employment letter, (iv)
misrepresentations or breach by her regarding specified conflicting obligations
or specified claims regarding conflicting obligations, (v) conviction of a
felony involving dishonesty or fraud, (vi) certain acts contrary to directions
of the Board of Directors, or (vii) material breaches of the employment letter.
The employment letter provides notice and a chance to cure the items described
in clauses (i) and (ii).

"Good Reason" under the employment letter generally means voluntary
termination of employment with the Company as a result of (i) a reduction
without her consent in duties, responsibilities, benefits or compensation, (ii)
material breach by the Company of the employment letter, (iii) any requirement
that she relocate outside of specified areas, or (iv) any failure of a successor
to the Company's business after a change in control to assume the Company's
obligations under the employment letter. "Change in Control" under the
employment letter generally means (i) any person (excluding specified related
parties) becoming the owner of 30% or more of the Company's capital stock, (ii)
the consummation of a business combination unless the shareholders before the
combination own more than 40% of the combined entity in substantially the same
proportions, (iii) a sale of substantially all of the Company's assets, (iv) the
continuing directors of the Company cease to be a majority of the Company's
directors, or (v) dissolution of the Company and liquidation of substantially
all of its assets.

Pursuant to the terms of a Termination Agreement, dated as of May 12, 1998,
subject to the consummation of the merger between the Company and HOM Holding,
Inc. and Hit or Miss, Inc., which merger was terminated in November 1998, the
Company and Ms. Stern agreed to terminate Ms. Stern's

12
<PAGE>
employment agreement and to terminate Ms. Stern's employment with the Company
thereunder as of the date of the merger. Under the Termination Agreement, Ms.
Stern was to receive severance payments in the aggregate amount of $750,000 in
equal monthly installments of $41,666.67 over the 18 month period following the
closing date of the merger (the "Termination Period"). During the Termination
Period, the Company was also to continue to provide Ms. Stern with medical,
disability and dental insurance to the same extent and on the same terms as were
available to the Company's executive officers. To the extent it was renewable or
Ms. Stern was insurable at standard rates, throughout the Termination Period the
Company was to maintain the life insurance policy which is provided pursuant to
Ms. Stern's employment letter and was to assign such policy to Ms. Stern at the
end of the Termination Period. Further, all unvested options held by Ms. Stern
as of the closing date of the merger were to vest and be exercisable for 90 days
thereafter. The Termination Agreement further provided that, during the
Termination Period, Ms. Stern was to continue to be available to the Company by
telephone, subject to her availability, to assist the Company with management or
strategic issues arising after the merger. In consideration of such terms, Ms.
Stern and the Company agreed to release one another from their respective
obligations and liabilities relating to Ms. Stern's employment with the Company
or the termination thereof. In April 1999, the Company and Ms. Stern terminated
the Termination Agreement and extended the employment letter for an additional
year on the terms described above.

L. DOUGLAS GANTOS. As of March 27, 1995, the Company entered into a letter
of employment with L. Douglas Gantos. This letter of employment was amended as
of March 19, 1996. Pursuant to Mr. Gantos' employment letter, as amended, he is
employed as part-time Chairperson of the Board or as a consultant to the Company
until September 8, 2000, unless earlier terminated. The Company's Board of
Directors will choose, in its sole discretion, which of the two positions he
will hold during that period. On May 19, 1998, the Company's Board of Directors
elected to employ Mr. Gantos as a consultant to the Company. Prior to that time,
Mr. Gantos served as Chairperson of the Board. Also, while Mr. Gantos receives
cash payments pursuant to the letter agreement, he will serve as a director of
the Company during any period in which the Company's Board of Directors desires
him to serve as a director, unless he is not elected by the shareholders or
dies.

Mr. Gantos' will receive (i) a salary of $250,000 while he is a consultant
or part-time Chairperson of the Board, (ii) a $1,000 a month car allowance and
an $8,000 a year tax, financial planning and legal advice allowance, (iii) life
insurance in the amount of $1,000,000 in addition to his $50,000 life insurance
policy, (iv) medical, dental and prescription drug coverage for himself and his
wife for their joint lives, to the same extent as such benefits are provided by
the Company to its executives, subject to the same contribution and co-payment
requirements applicable to other executive officers, and (v) fringe benefits
generally available to other executive officers of the Company.

Mr. Gantos will also receive termination benefits, which vary depending on
the reason for his termination. Regardless of the reason for his termination,
Mr. Gantos and his wife will receive the medical, dental and prescription drug
coverage described above for their joint lives. If Mr. Gantos' employment is
terminated before September 8, 2000 without "Cause" or by Mr. Gantos for "Good
Reason", he will be entitled to (i) his accrued bonus for the preceding year, if
any, and any other accrued compensation and benefits through the date of
termination, (ii) a continuation of his salary and benefits described above
through September 8, 2000 or his death, if earlier, and (iii) immediate vesting
of the stock options granted to him pursuant to the employment letter, and such
options will remain exercisable for their original term.

If Mr. Gantos' employment is terminated before September 8, 2000 by the
Company for "Cause" or by Mr. Gantos without "Good Reason", he will be entitled
to (i) his accrued bonus for the preceding year, if any, and any other accrued
compensation and benefits through the date of termination, and (ii) immediate
vesting of the stock options granted to him pursuant to the employment letter,
and such options will remain exercisable for their original term.

13
<PAGE>
If Mr. Gantos' employment is terminated before September 8, 2000 because of
his death, he will be entitled to (i) his accrued bonus for the preceding year,
if any, a pro-rated bonus for the year of termination, if any, and any other
accrued compensation and benefits through the date of termination, (ii) the
proceeds of his life insurance policy, and (iii) immediate vesting of the stock
options granted to him pursuant to the employment letter, and the options would
remain exercisable for their original term.

If Mr. Gantos' employment is terminated before September 8, 2000 because of
his disability, he will be entitled to (i) his accrued bonus for the preceding
year, if any, a pro-rated bonus for the year of termination, if any, and any
other accrued compensation and benefits through the date of termination, (ii) a
continuation of his salary described above through September 8, 2000 or his
death, if earlier, offset by any proceeds of disability insurance provided by
the Company, (iii) a continuation of the benefits described above for one year,
except that the life insurance policy would be maintained at least through
September 8, 2000 or his death, if earlier, and (iv) immediate vesting of the
stock options granted to him pursuant to the employment letter, and such options
would remain exercisable for their original term.

If Mr. Gantos' employment terminates because the agreement expires, he will
be entitled to (i) any accrued compensation and benefits through the date of
termination, and (ii) immediate vesting of the stock options granted to him
pursuant to the employment letter, and such options will remain exercisable for
their original term.

The termination benefits described above are Mr. Gantos' exclusive rights
with respect to termination of his employment. For purposes of Mr. Gantos'
employment letter, "Cause" generally means continued failure to either devote
substantially full working time to his duties (while he is a full-time employee)
or make a good faith effort to perform his employment duties, willful acts or
omissions materially injuring the Company, conviction of a felony involving
dishonesty or fraud that is injurious to the Company, or any material breach by
Mr. Gantos of the non-competition provisions of the employment letter. "Good
Reason" under the employment letter generally means termination as a result of
substantial reduction in Mr. Gantos' duties, responsibilities, benefits or
compensation, any material breach by the Company of the employment letter, any
requirement that Mr. Gantos relocate outside of specified areas or the failure
to elect Mr. Gantos as a director while he is an officer.

DENNIS HORSTMAN. The Company has a letter of employment, dated as of
November 1, 1996, as amended, with Dennis Horstman. Pursuant to Mr. Horstman's
employment letter he is employed as the Company's Senior Vice President,
Merchandising and Marketing. Mr. Horstman's employment letter provides him with
(i) an initial salary of $300,000, (ii) the right to participate in the
Company's Executive Bonus Plan, and a minimum bonus of $52,500 for 1997, (iii)
twelve months separation pay, as his exclusive severance benefit, if his
employment is terminated without cause (other than pursuant to his death or
disability) before December 2, 2000 (subject to Mr. Horstman's obligation to
seek other employment and the Company's right to offset amounts paid to Mr.
Horstman from such other employment during the severance period), (iv)
reimbursement for various relocation expenses, (v) fringe benefits the Company
provides its other Senior Vice Presidents, and (vi) a grant of an option to
purchase 35,000 common shares, which was granted December 2, 1996.

NEAL GOTTFRIED. The Company has a letter of employment, dated as of April
23, 1997, with Neal Gottfried. Pursuant to Mr. Gottfried's employment letter he
is employed as the Company's Senior Vice President, Store Operations and Visual
Merchandising. Mr. Gottfried's employment letter provides him with (i) an
initial salary of $225,000, (ii) the right to participate in the Company's
Executive Bonus Plan, (iii) twelve months separation pay, as his exclusive
severance benefit, if his employment is terminated without cause (other than
pursuant to his death or disability) before April 23, 1999 (subject to Mr.
Gottfried's obligation to seek other employment and the Company's right to
offset amounts paid to Mr. Gottfried from such other employment during the
severance period), (iv) reimbursement for various relocation expenses, (v)
fringe benefits the Company provides its other Vice Presidents, and (vi) a grant
of an option to purchase 25,000 common shares.

14
<PAGE>
VICKI BOUDREAUX. The Company has a letter of employment, dated as of
September 3, 1996, with Vicki Boudreaux. Pursuant to Ms. Boudreaux's employment
letter she is employed as the Company's Vice President, Planning and Allocation.
Ms. Boudreaux's employment letter provides her with (i) an initial salary of
$120,000, (ii) the right to participate in the Company's Executive Bonus Plan,
(iii) six months separation pay, as her exclusive severance benefit, if her
employment is terminated without cause (other than pursuant to her death or
disability) before September 16, 2000 (subject to Ms. Boudreaux's obligation to
seek other employment and the Company's right to offset amounts paid to Ms.
Boudreaux from such other employment during the severance period), (iv)
reimbursement for various relocation expenses, and (v) fringe benefits the
Company provides its other Vice Presidents, and (vi) a grant of an option to
purchase 10,000 common shares, which was granted September 16, 1996.

THOMAS VILLANO. The Company has a letter of employment, dated as of March
16, 1999, with Thomas Villano. Pursuant to Mr. Villano's employment letter he is
employed as the Company's Senior Vice President and Chief Financial Officer. Mr.
Villano's employment letter provides him with (i) an initial salary of $165,000,
(ii) the right to participate in the Company's Executive Bonus Plan, (iii)
twelve months separation pay, as his exclusive severance benefit, if his
employment is terminated without cause (other than pursuant to his death or
disability) before March 16, 2001 (subject to Mr. Villano's obligation to seek
other employment and the Company's right to offset amounts paid to Mr. Villano
from such other employment during the severance period), (iv) fringe benefits
the Company provides its other Vice Presidents, (v) a $750 a month travel
allowance, and (vi) a grant of an option to purchase 50,000 common shares, which
was granted to him on March 16, 1999.

DIANE ABATE-FOX. The Company has a letter of employment, dated as of March
29, 1999, with Diane Abate-Fox. Pursuant to Ms. Abate-Fox's employment letter he
is employed as the Company's Vice President, General Merchandise Manager. Ms.
Abate-Fox's employment letter provides her with (i) an initial salary of
$160,000, (ii) the right to participate in the Company's Executive Bonus Plan,
(iii) six months separation pay, as her exclusive severance benefit, if her
employment is terminated without cause (other than pursuant to his death or
disability) before March 29, 2001 (subject to Ms. Abate-Fox's obligation to seek
other employment and the Company's right to offset amounts paid to Ms. Abate-Fox
from such other employment during the severance period), and (iv) fringe
benefits the Company provides its other Vice Presidents.

JOSEPH KUHN. The Company has a letter of employment, dated as of March 16,
1999, with Joseph Kuhn. Pursuant to Mr. Kuhn's employment letter he is employed
as the Company's Vice President, Distribution, Real Estate and Construction. Mr.
Kuhn's employment letter provides him with (i) an initial salary of $105,000,
(ii) the right to participate in the Company's Executive Bonus Plan, (iii) six
months separation pay, as his exclusive severance benefit, if his employment is
terminated without cause (other than pursuant to his death or disability) before
March 16, 2001 (subject to Mr. Kuhn's obligation to seek other employment and
the Company's right to offset amounts paid to Mr. Kuhn from such other
employment during the severance period), and (iv) fringe benefits the Company
provides its other Vice Presidents.

MASTER SEVERANCE PLAN. On January 11, 1994, the Company's Board of
Directors adopted a Master Severance Plan as amended March 15, 1994. The Master
Severance Plan provides severance benefits to employees (including the officers
listed in the Summary Compensation Table above) if they are terminated without
cause. The amount of such benefits payable to executive officers of the Company
is (i) two weeks of the employee's base salary at the time of termination (one
week for Mr. Gantos) multiplied by the number of full years of such employee's
service to the Company at the time of termination; provided that such benefits
may not exceed one year of the employee's base compensation; plus (ii) such
employee's accrued vacation at the time of termination. As described above, Ms.
Stern, Mr. Gantos, Mr. Horstman, Mr. Gottfried, Ms. Boudreaux, Mr. Villano, Ms.
Abate-Fox and Mr. Kuhn have employment letters with the Company providing for
severance rights that differ from those under the Master Severance Plan.

15
<PAGE>
STOCK OPTION TERMS. The stock option granted to Ms. Stern on July 8, 1996
to purchase 350,000 common shares at $4.65625 a share provides that the option
becomes immediately exercisable upon termination of Ms. Stern's employment with
the Company, unless such termination is by the Company for Cause or by Ms. Stern
without Good Reason, and if a Change in Control occurs. The vested portion of
the options at the date of termination of Ms. Stern's employment with the
Company may be exercised (i) until one year after termination as a result of her
death or disability, and (ii) until 90 days after termination for any other
reason, except that all rights to exercise the options terminate if she is
terminated for Cause.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the fiscal year ended January 30, 1999 Mr. Schomer, Ms. Putnam and
Ms. Strasser served as sole members of the Company's Compensation Committee.
None of the members of the Company's Compensation Committee during the fiscal
year ended January 30, 1999 (i) was, during such fiscal year, an officer or
employee of the Company, or (ii) was formerly an officer of the Company or its
subsidiary.

PERFORMANCE GRAPH

The following line graph compares for the period since the Company's
emergence from Chapter 11 on March 31, 1995 (i) the yearly cumulative total
shareholder return (i.e., the change in share price divided by the initial share
price, expressed as a percentage; the Company has not paid cash dividends) on
the Company Common Stock with (ii) the cumulative total return of the CRSP Total
Return Index for The Nasdaq Stock Market (U.S. Companies), and with (iii) the
cumulative total return of the CRSP Total Return Index for the Nasdaq Retail
Trade Stocks:

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
GANTOS, INC. NASDAQ U.S. INDEX NASDAQ RETAIL INDEX
<S> <C> <C> <C>
Mar. 1995 100 100 100
Jul. 1995 63 123 116
Jan. 1996 57 130 110
Jul. 1996 115 134 126
Jan. 1997 75 171 136
Jul. 1997 63 197 149
Jan. 1998 15 202 158
Jul. 1998 30 233 178
Jan. 1999 33 316 194
</TABLE>
<TABLE>
<CAPTION>
HALF YEARS
-----------------------------------------------------------------------------------------
MAR. JUL. JAN. JUL. JAN. JUL. JAN.
1995 1995 1996 1996 1997 1997 1998
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Gantos, Inc.......................... 100 63 57 115 75 63 15
Nasdaq U.S. Index.................... 100 123 130 134 171 197 202
Nasdaq Retail Index.................. 100 116 110 126 136 149 158

JUL. JAN.
1998 1999
----- -----
<S> <C> <C>
Gantos, Inc.......................... 30 33
Nasdaq U.S. Index.................... 233 316
Nasdaq Retail Index.................. 178 194
</TABLE>

16
<PAGE>
Assumes $100 invested on March 31, 1995 in Gantos, Inc. Common Stock, CRSP Total
Return Index for The Nasdaq Stock Market (U.S. Companies) and CRSP Total Return
Index for Nasdaq Retail Trade Stocks.

* Total Return Assumes Reinvestment of Dividends.

CERTAIN TRANSACTIONS

Elizabeth M. Eveillard, a director of the Company, is the Managing Director
and head of the Retailing Industry Group for PaineWebber Incorporated, an
investment banking firm. The Company entered into a letter agreement dated as of
February 9, 1998 engaging PaineWebber Incorporated as its exclusive financial
advisor in connection with its proposed merger with HOM Holding, Inc. and Hit or
Miss Inc. The Company paid PaineWebber Incorporated a $50,000 retention fee and
a $250,000 fee in connection with its fairness opinion pursuant to that letter.
The proposed merger was terminated in November 1998.

Hannah H. Strasser, a director of the Company, is co-head of the high yield
group, responsible for portfolio management and research for Cardinal Capital
Management LLC, a money management company of which Ms. Strasser is a 45%
general partner and one of its founders. Cardinal Capital Management LLC is a 1%
general partner in Cardinal Recovery Partners and an investment manager for
Argyll Limited. Cardinal Recovery Partners and Argyll Limited are holders of
$1,312,157 and $50,054 in original principal amount of the Company's outstanding
12 3/4% Notes issued pursuant to an Indenture dated as of April 1, 1995. During
1998 the Company issued them the following five-year warrants at the following
exercise prices to purchase shares of Common Stock in exchange for their consent
to amendments to the Indenture to cure potential defaults under the Indenture
and defer various Indenture payments:

<TABLE>
<CAPTION>
NOTE HOLDER WARRANT SHARES SHARES EXERCISED EXERCISE PRICE
- -------------------------------------------- --------------- --------------------- ---------------
<S> <C> <C> <C>
Cardinal Recovery Partners.................. 24,728 0 $ 0.01
Cardinal Recovery Partners.................. 16,484 0 $ 0.75
Argyll Limited.............................. 945 0 $ 0.01
Argyll Limited.............................. 629 0 $ 0.75
</TABLE>

The Company granted registration rights to the holders of the warrants and filed
a registration with respect to the resale of the Common Stock underlying the
warrants, which became effective in December 1998.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) reports
they file.

To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended January 30, 1999 all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with, except that for 1998, one
report covering one exempt option grant transaction was filed late by each of
Jeffrey C. Tuori, Joseph Giudice, Vicki Boudreaux, Hope Grey, Dennis Horstman,
David Nelson, Neal Gottfried, Elizabeth M. Eveillard, Fred K. Schomer, Erwin A.
Marks, S. Amanda Putnam, Mary Elizabeth Burton and Hannah Strasser.

17
<PAGE>
II. APPROVAL OF ONE-FOR-THREE REVERSE STOCK SPLIT

GENERAL

The Board of Directors has determined that it would be advisable to amend
and restate the Company's Restated Articles of Incorporation to (i) effect a
one-for-three reverse split of the Company's issued and outstanding Common
Shares while keeping 20,000,000 authorized Common Shares, at a par value of
$0.01, and 2,000,000 authorized Preferred Shares, at a par value of $0.01 (the
"Reverse Split"), and (ii) provide for the rounding to the nearest whole share
in lieu of fractional shares otherwise issuable.

Subject to shareholder approval, the Board of Directors has approved an
amendment and restatement of the Company's Restated Articles of Incorporation
which would add a new paragraph to Article III of the Restated Articles of
Incorporation that would result in one post-split Common Share ("Post-Split
Common Share") being issued in exchange for every three Common Shares issued and
outstanding on the effective date of the Reverse Split ("Pre-Split Common
Shares"), all substantially as set forth in the form of Restated Articles of
Incorporation attached as EXHIBIT A (collectively, the "Amendment"). The Reverse
Split will not affect the par value of the authorized Common Shares, and the
number of authorized Common Shares will be 20,000,000 Common Shares, $0.01 par
value per share. The Reverse Split will not affect the number or par value of
the authorized Preferred Shares, which will remain at 2,000,000 Preferred
Shares, $0.01 par value per share.

The Reverse Split will become effective upon the filing with the Michigan
Department of Consumer and Industry Services, Corporation, Securities and Land
Development Bureau of Restated Articles of Incorporation, which state that, at
the close of business on the date of filing of the Restated Articles of
Incorporation, each Common Share then issued and outstanding would
automatically, without any action on the part of the holders of such Common
Shares, become and be converted into one-third of a Common Share, subject to
adjustment to eliminate fractional shares. If the Amendment is approved and
management determines to proceed with the Reverse Split (see "Reservation of
Rights"), management will use its discretion to determine when to file the
Amendment. Management currently expects such amendment to be filed shortly after
the Annual Meeting if The Nasdaq Stock Market, Inc. approves the continued
listing of the Company's Common Shares, subject to the consummation of the
Reverse Split. See "Purposes of the Reverse Split."

PRINCIPAL EFFECTS OF REVERSE SPLIT

Based upon the 7,819,526 Common Shares outstanding as of May 4, 1999, the
Reverse Split would decrease the outstanding Common Shares by approximately
66 2/3%, and, once effective, the Reverse Split would result in approximately
2,606,509 Post-Split Common Shares outstanding, subject to adjustment as a
result of the elimination of fractional shares. Similarly, the aggregate number
of Common Shares reserved for issuance upon exercise of warrants and options
would decrease from approximately Common Shares to approximately
Common Shares, subject to adjustment as a result of the elimination of
fractional shares.

Each outstanding option or warrant will automatically become an option or
warrant, as the case may be, to purchase 33 1/3% of the number of shares subject
to the option or warrant immediately prior to the Reverse Split at an exercise
price which is three times the exercise price of the option or warrant
immediately prior to the Reverse Split, subject to adjustment as a result of the
elimination of fractional shares. In addition, the shares available for issuance
under the Company's Director Stock Option Plan, 1996 Stock Option Plan and
Employee Stock Purchase Plan will be reduced by approximately 66 2/3% to reflect
the Reverse Split, subject to adjustments required to eliminate fractional
shares, and the other relevant terms and provisions of the Company's stock
option plans and stock purchase plan will be appropriately adjusted to reflect
the Reverse Split. The Company will obtain a new CUSIP number for the Common
Shares effective at the time of the Reverse Split. Following the effectiveness
of the Reverse Split,

18
<PAGE>
the Company will provide each record holder of Common Shares information to
enable such holder to obtain new shares and certificates.

The Reverse Split will not affect the par value of the authorized Common
Shares, and the number of authorized Common Shares will be 20,000,000 Common
Shares, $0.01 par value per share. The Reverse Split will not affect the number
or par value of the authorized Preferred Shares, which will remain at 2,000,000
Preferred Shares, $0.01 par value per share. As a result, if the Amendment is
approved, the decrease in the number of shares outstanding and reserved for
issuance pursuant to the exercise of options and warrants will result in an
increase in the number of shares available for issuance. The terms of the
Post-Split Common Shares will be the same as the terms of the Pre-Split Common
Shares, and subject to the provisions for the elimination of fractional shares,
as described below, consummation of the Reverse Split will not result in a
change in the relative equity interest in the Company or the voting power or
other rights, preferences or privileges of the holders of Common Shares.

The following table illustrates the principal effects of the proposed
reverse stock split discussed in the preceding paragraphs:

<TABLE>
<CAPTION>
BEFORE REVERSE
SPLIT AFTER REVERSE SPLIT
NUMBER OF COMMON SHARES AND THE AMENDMENT AND THE AMENDMENT
- --------------------------------------------------- ------------------- -------------------
<S> <C> <C>
Authorized......................................... 20,000,000 20,000,000
Outstanding........................................ 7,819,526 2,606,509
Subject to outstanding options and warrants........ 1,088,000 362,666
Reserved for issuance in connection with future
grants under option plans and the Stock Purchase
Plan............................................. 9,842 3,281
Available for future issuance by action of the
Board (after giving effect to the above
reservations).................................... 11,082,632 17,027,544
</TABLE>

Assuming the Reverse Split is approved and management determines to proceed
with the Reverse Split (see "Reservation of Rights"), the Company will file
Restated Articles of Incorporation, in the form set forth in EXHIBIT A, with the
Michigan Department of Consumer and Industry Services, Corporation, Securities
and Land Development Bureau effecting the Reverse Split on a date determined by
management in its discretion. Management currently expects such amendment to be
filed shortly after the Annual Meeting if The Nasdaq Stock Market, Inc. approves
the continued listing of the Company's Common Shares, subject to the
consummation of the Reverse Split. See "Purposes of the Reverse Split." The
Reverse Split would become effective as of the close of business on the date of
such filing (the "Effective Date").

PURPOSES OF THE REVERSE SPLIT

The Reverse Split would decrease the number of Common Shares outstanding and
presumably increase the per share market price for the Post-Split Common Shares.
The Company's Board of Directors believes that the relatively low market price
per share of the Company's Common Shares may impair the marketability of the
Common Shares to institutional investors and members of the investing public. In
theory, the number of shares outstanding should not, alone, affect the
marketability of the Common Shares, the type of investor who acquires them, or
the Company's reputation in the financial community. In practice, however, this
is often not the case, because many investors look upon low-priced shares as
speculative in nature, and as a matter of policy, avoid investment in such
stocks. These factors may not only affect the liquidity of the Common Shares,
but may also impair the Company's ability to raise additional capital through
the sale of equity securities.

19
<PAGE>
The Board also recognizes that many leading brokerage firms are reluctant to
recommend lower-priced securities to their clients. In addition, a variety of
brokerage house policies and practices currently tends to discourage individual
brokers within firms from dealing in lower-priced stocks. Some of those policies
and practices relate to the payment of brokers' commissions and time-consuming
procedures that make the handling of lower priced stocks economically
unattractive to brokers. The structure of brokerage commissions tends to
adversely impact holders of lower-priced stocks because brokerage commissions on
a sale of a lower-priced stock generally represent a higher percentage of the
sales price than the commissions on higher-priced stocks. In addition, stocks
that trade for less than $5.00 are subject to restrictions relating to the
stock's marginability and to additional requirements for brokers who recommend
such stocks to their clients (if they are not quoted on The Nasdaq Stock
Market), and such restrictions tend to adversely impact the stock's
marketability and, consequently the stock's price.

The Company's Common Shares are currently listed on The Nasdaq National
Market; however, there is no assurance that the Company will continue to meet
the maintenance standards for continued listing on The Nasdaq National Market or
The Nasdaq SmallCap Market. Under The Nasdaq National Market's and The Nasdaq
SmallCap Market's listing criteria, listed companies which do not have a $1.00
minimum bid price for a sustained period risk de-listing by The Nasdaq Stock
Market. The Company has not met this requirement with respect to its Common
Shares and is subject to de-listing from The Nasdaq Stock Market. The Company is
also currently not in compliance with The Nasdaq National Market's requirement
that it maintain a minimum $5,000,000 market value of public float. The Company
has requested an exception to these requirements until it can effect the Reverse
Split, and in the alternative, has requested to be listed on The Nasdaq SmallCap
Market after the Reverse Split, because its market value of public float
requirement is only $1,000,000. The Reverse Split is proposed, in part, to allow
the Company to regain compliance with the $1.00 minimum bid price requirement.
However, management does not intend to consummate the Reverse Split if The
Nasdaq Stock Market, Inc. does not approve the continued listing of the
Company's Common Shares subject to consummation of the Reverse Split.

If the Company is unable to satisfy the applicable market's requirements for
continued listing, including, among other things, an adequately high trading
price and market value of public float, trading of the Common Shares would
thereafter be conducted in the over-the-counter market in the so-called "pink
sheets" or Nasdaq's OTC Bulletin Board. Consequently, the liquidity of the
Company's Common Shares could be impaired, through delays in the timing of
transactions, reduction in the news media's coverage of the Company, lack of
investment analyst interest in covering the Company, and lower prices for the
Company's Common Shares than might otherwise be obtained.

The Board of Directors hopes that the decrease in the number of Common
Shares outstanding resulting from the Reverse Split and the anticipated
corresponding increased price per share will stimulate interest in the Company's
Common Shares, promote greater liquidity for the Company's shareholders and
result in a price level for the Post-Split Common Shares that will maintain its
Nasdaq listing. The Board also hopes that the Reverse Split will result in a
price level for the Post-Split Common Shares that will mitigate the present
reluctance, policies and practices of brokerage firms, and diminish the adverse
impact of trading commissions, recommendation restrictions and margin
requirements on the potential market for the Company's Common Shares. However,
there is no assurance that the Reverse Split will achieve the desired results,
that the price per Post-Split Common Share will increase proportionately with
the decrease in the number of shares, that the Post-Split Common Shares will be
marginable, or that any price increase can be sustained for a prolonged period
of time. In addition, it is possible that the liquidity of the Post-Split Common
Shares may be adversely affected by the reduced number of shares outstanding if
the proposed Reverse Split is effected. In addition, the Reverse Split might
leave some shareholders with one or more "odd-lots" of the Company's Common
Shares (stock in amounts of less than 100 shares). These shares may be more
difficult to sell, or require a greater commission per share to sell, than
shares in even multiples of 100.

20
<PAGE>
The Reverse Split is also being proposed to increase the number of the
Company's authorized but unissued Common Shares. As of May 4, 1999, the Company
had 20,000,000 Common Shares authorized, 7,819,526 Common Shares issued and
outstanding and 1,097,842 Common Shares reserved for issuance pursuant to the
exercise of options and warrants outstanding or reserved for grant under Company
stock option plans. After the Reverse Split, the Company would have 20,000,000
Common Shares authorized, but would only have approximately 2,606,509 Common
Shares issued and outstanding and 11,082,632 Common Shares reserved for
issuance, subject to adjustment as a result of the elimination of fractional
shares.

If the Reverse Split is approved by the shareholders of the Company, the
additional 5,944,912 Post-Split Common Shares so authorized will be available
for issuance by the Board of Directors of the Company for raising additional
capital, stock options, acquisitions, stock splits, stock dividends or other
corporate purposes. There are no arrangements, understandings or plans for the
issuance of any such additional shares, other than shares reserved for issuance
upon the exercise of stock options and warrants outstanding or authorized for
issuance under the Stock Purchase Plan or other existing plans, although there
are no current plans for any specific grants. The Company does not expect that
it would seek authorization from shareholders for issuance of such additional
shares unless required by applicable law or regulation or the rules of the
market in which the Company's Common Shares are traded. There are no preemptive
rights available to shareholders in connection with the issuance of such shares.

The Board of Directors believes that the Reverse Split is in the best
interest of the Company and its shareholders.

EXCHANGE OF CERTIFICATES AND ELIMINATION OF FRACTIONAL SHARE INTERESTS

On the Effective Date, each three Pre-Split Common Shares will automatically
be combined and changed into one Post-Split Common Share. No additional action
on the part of the Company or any shareholder will be required in order to
effect the Reverse Split and beginning on the Effective Date, each certificate
representing Pre-Split Common Shares will represent for all purposes one-third
of that number of Post-Split Common Shares. Shareholders will be requested to
exchange their certificates representing Common Shares held prior to the Reverse
Split for new certificates representing Common Shares issued as a result of the
Reverse Split. The Company's transfer agent will act as the Company's exchange
agent to act for holders of Common Shares in implementing the exchange of their
certificates. Shareholders will be furnished the necessary materials and
instructions to effect such exchange promptly following the Effective Date.
Certificates representing Pre-Split Common Shares subsequently presented for
transfer will not be transferred on the books and records of the Company but
will be returned to the tendering person for exchange. Shareholders should not
submit any certificates until requested to do so.

No scrip or fractional Post-Split Common Shares will be issued to any
shareholder in connection with the Reverse Split. Accordingly, all shareholders
of record who would otherwise be entitled to receive fractional Post-Split
Common Shares, will, upon surrender of their 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. Holders of less
than two Pre-Split Common Shares as a result of the Reverse Split will on the
Effective Date no longer be shareholders of the Company.

Shareholders are encouraged to surrender their certificates for certificates
evidencing whole Post-Split Common Shares as promptly as possible after the
Effective Date. The ownership of a fractional interest will not give the holder
any voting, dividend, or other rights except to receive one or zero Post-Split
Common Shares therefor as described above.

21
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE SPLIT

The following general description of the federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended, the applicable treasury
regulations promulgated thereunder, judicial authority and current
administrative rulings and practices as in effect on the date of this Proxy
Statement, all of which are subject to change and any such change could apply
retroactively. This discussion is for general information only and does not
purport to deal with all aspects of federal income taxation that may be relevant
to holders of Common Shares and does not discuss consequences which may apply to
special classes of taxpayers (e.g., non-resident aliens, broker-dealers,
tax-exempt organizations, banks or insurance companies). Shareholders are urged
to consult their own tax advisors to determine the particular federal, state,
local and foreign tax consequences to them.

The combination and change of each three Pre-Split Common Shares into one
Post-Split Common Share should be a tax-free transaction, and no gain or loss
will be recognized to the Company or its shareholders. The holding period of the
Pre-Split Common Shares will be transferred to the Post-Split Common Shares
received in exchange therefor, provided that the shareholder held the Pre-Split
Common Shares as a capital asset at the time of the exchange. The tax basis in
the Post-Split Common Shares will equal the tax basis in the Pre-Split Common
Shares exchanged therefor.

This discussion should not be considered as tax or investment advice, and
the tax consequences of the Reverse Split may not be the same for all
shareholders. Shareholders should consult their own tax advisors to ascertain
their individual federal, state, local and foreign tax consequences.

FINANCIAL STATEMENTS

The Company's Annual Report for the year ended January 30, 1999 includes the
Company's audited financial statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," which are incorporated by
reference in this Proxy Statement. A copy of the Annual Report accompanies this
Proxy Statement.

VOTE REQUIRED

Approval of the Amendment requires the affirmative vote of the holders of a
majority of the outstanding Common Shares. Abstentions and broker non-votes will
not be deemed affirmative votes, and will have the same effect as a negative
vote on the proposal. Such votes, however, will be counted in determining the
number of Common Shares present or represented by proxy in determining whether a
quorum is present Proxies received in response to this solicitation will, in the
absence of any contrary specification, be voted in favor of the proposal.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.

RESERVATION OF RIGHTS

The Board of Directors reserves the right to abandon the proposed Amendment
and Reverse Split without further action by the shareholders at any time before
the filing of the Amendment with the Michigan Department of Consumer and
Industry Services, Corporation, Securities and Land Development Bureau
notwithstanding authorization of the proposed Amendment and Reverse Split by the
shareholders. Management currently intends to abandon the proposed Amendment and
Reverse Split if The Nasdaq Stock Market, Inc. either (i) does not approve the
continued listing of the Company's Common Shares, (ii) or approves such
continued listing but does make it subject to the consummation of the Reverse
Split.

22
<PAGE>
ITEM III. OTHER MATTERS

RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS

PricewaterhouseCoopers LLP are the independent accountants for the Company
and have reported on the Company's financial statements in the Annual Report of
the Company which accompanies this Proxy Statement. The Company's independent
accountants are appointed by the Board of Directors after receiving the
recommendation of its Audit Committee. The Company will not select its
independent accountants for 1999 until later in its fiscal year.

Representatives of PricewaterhouseCoopers LLP are expected to be present at
the Annual Meeting of Shareholders and will have the opportunity to make a
statement at the meeting if they desire to do so. The representatives will also
be available to respond to appropriate questions.

OTHER PROPOSALS

Neither the Company nor the members of its Board of Directors intend to
bring before the Annual Meeting any matters other than those set forth in the
Notice of Annual Meeting, and they have no present knowledge that any other
matters will be presented for action at the meeting by others. If any other
matters properly come before such meeting, however, it is the intention of the
persons named in the enclosed form of proxy to vote in accordance with their
best judgment.

A shareholder proposal which is intended to be presented at the 2000 Annual
Meeting of Shareholders and is eligible for inclusion in the Company's proxy
statement for that meeting under applicable rules of the Securities and Exchange
Commission must be received by the Company at its principal executive offices,
1266 Main Street, Fifth Floor, Stamford, Connecticut 06902 by January 13, 2000.
Such proposals should be sent to the Secretary of the Company by certified mail,
return receipt requested.

The Company must receive notice of any proposals of shareholders that are
intended to be presented at the 2000 Annual Meeting of Shareholders, but that
are not intended to be considered for inclusion in the Company's Proxy Statement
and Proxy related to that meeting, no later than March 28, 2000 to be considered
timely. Such proposals should be sent to the Secretary of the Company by
certified mail, return receipt requested and addressed to Gantos, Inc., 1266
Main Street, Fifth Floor, Stamford, Connecticut 06902, Attention: Secretary. If
the Company does not have notice of the matter by that date, the Company's form
of proxy in connection with that meeting may confer discretionary authority to
vote on that matter, and the persons named in the Company's form of proxy will
vote the shares represented by such proxies in accordance with their best
judgment.

By Order of the Board of Directors

Arlene H. Stern
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Dated: May 19, 1999

23
<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EXHIBIT A
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 date
within 90 days after received date is stated in the document.
- --------------------------------------------

- --------------------------------------------
- --------------------------------------------------------------------

Name Robert J. Krueger
Honigman Miller Schwartz and Cohn
- --------------------------------------------------------------
Address
2290 First National Building
- --------------------------------------------------------------
City State Zip Code
Detroit, Michigan 48226-3583 EFFECTIVE DATE
- --------------------------------------------------------------
</TABLE>

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 purposes for which corporations may be organized under
the Business Corporation Act of Michigan.
<PAGE>
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 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
<PAGE>
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
majority of the directors then in office. If the number of
<PAGE>
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>
(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 OFTHE 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_________.

------------------------------------------------------
------------------------------------------------------

------------------------------------------------------
------------------------------------------------------
(Signatures 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____, 19__99__ 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 ____June____, __1999__

By __________________________________________________________________

(Signature of an authorized officer or agent)

__Arlene H. Stern, President_________________________________________

(Type or Print Name)
<PAGE>

<TABLE>
<S> <C>
Name of person or organization Preparers name and business
remitting fees: telephone number:

Gantos, Inc. Robert J. Krueger
- ---------------------------------------------- ----------------------------------------------

(313) 465-7452
- ---------------------------------------------- ----------------------------------------------
</TABLE>

INFORMATION AND INSTRUCTIONS

1. The Articles of Incorporation cannot be restated until this form, or a
comparable document, is submitted.

2. Submit one original of this document. Upon filing, the document will be
added to the records of the Corporation, Securities and Land Development
Bureau. The original will be returned to your registered office address,
unless you enter a different address in the box on the front of this
document.

Since this document will be maintained on optical disk media, it is
important that the filing be legible. Documents with poor black and white
contrast, or otherwise illegible, will be rejected.

3. This document is to be used pursuant to sections 641 through 643 of Act
284. P.A. of 1972, for the purpose of restating the Articles of
Incorporation of a domestic profit corporation. Restated articles of
incorporation are an integration into a single instrument of the current
provisions of the corporation's Articles of Incorporation, along with any
desired amendments to those articles.

4. Item 2--Enter the identification number previously assigned by the Bureau.
If this number is unknown, leave it blank.

5. Item 5--Restated Articles of Incorporation submitted before the first
meeting of the Board of Directors may be adopted by all of the
incorporators by completing item 5(a). Restated Articles of Incorporation
which do not amend the Articles of Incorporation may be adopted by the
Board of Directors without a vote of the shareholders by completing Item
5(b). Restated Articles of Incorporation which amend the Articles of
Incorporation require adoption by the shareholders by completing Item
5(b).

6. The duration of the corporation should be stated in the restated Articles
of Incorporation only if it is not perpetual.

7. For nonprofit charitable corporations, if restated articles change the
term of existence to other than perpetual, Attorney General Consent should
be obtained at the time of dissolution.

8. This document is effective on the date endorsed "filed" by the Bureau. A
later effective date, no more than 90 days after the date of delivery, may
be stated.

9. This document must be signed by: (COMPLETE Item 5(a) or 5(b), BUT NOT
BOTH)

Item 5(a): must be completed and signed by a majority of the
incorporators.

Item 5(b): must be completed and signed by an authorized officer or agent.

10. FEES: Make remittance payable to the State of Michigan. Include
corporation name and identification number on check or money order.

<TABLE>
<S> <C> <C>
NONREFUNDABLE FEE......................................................................................... ........... $10.00
TOTAL MINIMUM FEE......................................................................................... ........... $10.00
ADDITIONAL FEES DUE FOR INCREASED AUTHORIZED SHARES ARE:
each additional 20,000 authorized shares or portion thereof........................................... $30.00
maximum fee per filing for first 10,000,000 authorized shares......................................... $5,000.00
each additional 20,000 authorized shares or portion thereof in excess of 10,000,000 shares............ $30.00
maximum fee per filing for authorized shares in excess of 10,000,000 shares........................... $200,000.00
</TABLE>

<TABLE>
<S> <C>
To submit by mail: To submit in person:
Michigan Department of Consumer & Industry Services 6546 Mercantile Way
Corporation, Securities and Land Development Bureau Lansing, MI
Corporation Division Telephone: (517) 334-6302
7150 Harns Drive
P.O. Box 30054 *Fees may be paid by VISA or Mastercard when delivered in
Lansing, MI 48909 person to our office.
</TABLE>

To submit electronically: (517) 334-8048

*To use this service a MICH-ELF application to provide your VISA or
Mastercard number. Include your assigned Filer number on your
transmission. To obtain an application for a filer number, contact
(517) 334-6327 or visit our WEB site at
http://www.cis.state.mi.us/corp/.
<PAGE>

THIS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF

GANTOS, INC.

The undersigned hereby appoints Arlene H. Stern, Thomas Villano and Robert
Baker, and each of them, the proxies of the undersigned, each with full power
of substitution and resubstitution, to vote all Common Shares, par value $.01
per share, of the undersigned in Gantos, Inc. ("Company") which the
undersigned is entitled to vote at the Annual Meeting of Shareholders of the
Company to be held on June 22, 1999, and at any and all adjournments thereof.

IMPORTANT--THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE

(continued on reverse side)

<PAGE>

X PLEASE MARK YOUR VOTES AS INDICATED
IN THIS EXAMPLE

FOR all the nominees WITHHOLD AUTHORITY
listed below (except to vote for all the
as marked to the nominees listed
contrary below). below.
1. ELECTION OF DIRECTORS / / / /

L. Douglas Gantos, Hannah H. Strasser, Elizabeth M. Eveillard and S. Amanda
Putnam (INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)

----------------------------------------------------------------------------
FOR ABSTAIN AGAINST
2. Approval of the amendment and restatement of / / / / / /
the Company's Restated Articles of Incorporation
to effect a one-for-three reverse stock split
of the Company's Common Shares while keeping
20,000,000 authorized Common Shares, at a
par value of $0.01.

3. In their discretion with respect to any other
matters that may properly come before the
meeting.
Account No. No. of Shares Proxy No.

THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE HEREIN. IF NO SPECIFICATIONS ARE MADE, THIS PROXY WILL BE
VOTED FOR THE ELECTION OF DIRECTORS NAMED IN THIS PROXY AND FOR PROPOSAL 2.

Signature(s)__________________________________ (L.S.)

______________________________________________ (L.S.) Dated:____________ , 1999
IMPORTANT: Please sign exactly as your name appears hereon. When signing as
attorney, executor, administrator or guardian, please give your full title as
such. If shares are held in the name of more than one person, each person
must sign the Proxy.

PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY IN THE ACCOMPANYING POSTPAID
ENVELOPE.