ITEM 1. BUSINESS
Gantos is a specialty retailer of a full range of quality, fashionable women's apparel and accessories at moderate to higher prices. As of April 15, 1996, Gantos operated 113 stores averaging 8,000 square feet, in 23 states, located primarily in suburban malls in the West, Midwest and Northeast. The Company plans to open one to three new stores in 1996. The Company offers an edited selection of primarily name brand sportswear, career dresses and suits, social occasion dresses, accessories, outerwear, swimwear, and in selected stores, shoes. The Company's marketing strategy emphasizes quality merchandise with assortments from which women can build entire wardrobes, personal attention and customer service. It is targeted to satisfying the apparel needs of active, educated, career-orientated, fashion-conscious women, primarily from 30 to late 50 years of age. The Company's four Boutiques located in Illinois and Michigan feature final clearance merchandise, primarily from Gantos stores. In March 1995, Gantos, Inc. (formerly known as Gantos Stores, Inc., a wholly owned subsidiary of the former Gantos, Inc.) became the successor of the former Gantos, Inc. pursuant to a merger. The former Gantos, Inc. merged into Gantos Stores, Inc., which then changed its name to Gantos Inc. Gantos, Inc. is a Michigan corporation incorporated November 10, 1952 as a successor to a business founded in 1932. Unless otherwise specified, "Gantos" and "Company" refer to the Registrant and its predecessors, and 1995, 1994 and 1993 refer to the fiscal years ended February 3, 1996, January 28, 1995, and January 29, 1994, respectively.
RECENT DEVELOPMENTS
Chapter 11 Reorganization.
On November 12, 1993 (the "Petition Date"), the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of Michigan. Under the protection of Chapter 11, the Company managed its affairs and operated its business as a debtor-in-possession while developing a plan of reorganization. The Company filed its Joint Plan of Reorganization on September 29, 1994, the First Amended Joint Plan of Reorganization on December 22, 1994, and the Second Amended Joint Plan of Reorganization on January 19, 1995, (as amended March 7, 1995, the "Plan") along with its Disclosure Statement. On January 19, 1995, the Bankruptcy Court approved the Disclosure Statement as containing adequate information and established February 27, 1995, as the deadline for voting on the Plan. The Plan was approved by 93% of the shareholders and 99% of the creditors that voted. On March 7, 1995, the Bankruptcy Court confirmed the Plan as amended. The effective date of the Plan was March 31, 1995.
Claims and interests in the Company were classified into 9 classes under the Plan. The following table summarizes the classification of claims and interests under the Plan and the treatment of such claims and interests under the Plan:
Class Description of Treatment ----- ------------------------
1. Priority Claims (claims under Each holder of an allowed Class 1 Section 507(a) under the claim received cash equal to the Bankruptcy Code, other than amount of the allowed claim. administrative and priority tax claims).
2. Convenience Claims (unsecured Each holder of an allowed Class 2 claims less than, or reduced to, claim received cash equal to the $200). amount of such allowed claim (as reduced, if applicable, pursuant to an election by the holder of such claim).
3. Secured Claims (other than bank Each holder of an allowed Class 3 secured claims). claim had its claim reinstated.
4. Settled Class Action Claims The class action settlement trustee (claims against the Company and received 168,269 newly-issued certain of its officers and Common Shares and $550,000 in cash, directors brought pursuant to which cash was paid by the Company's the securities class action insurance company. lawsuit filed March 16, 1994 and the related claim filed in the bankruptcy proceedings).
5. Bank Claims. The holders of allowed Class 5 claims received (a) $15,893,290 in cash, (b) 1,249,745 Common Shares, and (c) $5,058,293 in original principal amount of notes bearing interest at 12.75% and due April 1, 2001 ("New Notes").
6. Unsecured Claims. Each eligible Class 6 claim holder received, at the election of such holder, for each dollar of an allowed claim either (i) (x) $.50 in cash and (y) Common Shares (valued for this purpose as $4.16 a share) with a hypothetical value of $.50, or (ii) $1.00 in original principal amount of New Notes. One holder of a Class 6 claim was not eligible to receive cash and Common Shares and received $7.2 million in New Notes instead. Holders of Class 6 claims that were not allowed as of January 19, 1995, were not eligible to receive New Notes. The Company issued approximately $7.3 million in New Notes, 3.3 million Common Shares and $13.9 million in cash to holders of unsecured claims.
7. Holders of Gantos, Inc. Common Each holder of an allowed Class 7 Shares before March 31, 1995. interest is entitled to receive one Common Share for each two Common Shares previously held.
8. Holder of Gantos Stores, Inc. Gantos Stores, Inc. Common Shares Common Shares outstanding before March 31, 1995, were canceled pursuant to the Merger Agreement between Gantos, Inc. and Gantos Stores, Inc.
9. Other equity interests in No property was distributed to Gantos, Inc. including stock or was retained by the holders of options outstanding before interests in Class 9 on account March 31, 1995. of such interests.
Administrative claims and priority tax claims were not classified under the Plan. The Plan provided for payment in full in cash of all administrative claims. In accordance with terms under the Plan, the Company exercised its right to pay in full in cash all Priority tax claims. The Plan had allowed the Company to defer cash payments of the Priority tax claims over a six-year period, plus simple interest at 7% a year, beginning March 31, 1996, or such other rate of interest required to be paid by the Bankruptcy Court.
The percentages of Common Shares distributed to old shareholders and to creditors were subject to dilution on account of Common Share awards pursuant to the Amended and Restated Gantos, Inc. Stock Option Plan and the Amended and Restated
Gantos, Inc. Directors' Stock Option Plan, pursuant to which 1,655,802 Common Shares, in the aggregate, were reserved for grants and awards.
As of March 7, 1995, the Company had 5,329,526 Common Shares issued and outstanding before giving effect to the issuance of one new Common Share for every two outstanding Common Shares pursuant to the Plan and the Agreement of Merger between Gantos, Inc. and Gantos Stores, Inc. (the "Stock Reduction").
The Company issued approximately 4.6 million common shares and $12.4 million in aggregate principal amount of New Notes to unsecured creditors pursuant to the Plan, issued 168,269 common shares as partial settlement of the class action lawsuit, and issued 200,000 restricted shares to officers and employees, 23,000 of which have since been forfeited.
Facilities Closings and Other.
On November 11, 1993, the Company's Board of Directors approved a plan to realign the Company's operations in an effort to improve its long-term profit potential. This realignment enabled the Company to concentrate its efforts on those stores that management believed provided potential for ongoing profitability. The Company closed 41, 5, and 2 stores in fiscal 1993, 1994 and 1995, respectively. In October 1994, the Company reopened one of the stores closed in the prior year.
During 1993, the Company recorded a charge related to facilities closings and other of $29.3 million for the anticipated costs of the realignment, consisting primarily of expected costs of future lease obligations and rejection claims, losses on disposal of property and equipment, expenses and losses associated with the disposal of merchandise inventory in the closed stores and other expenses and losses directly related to the closure of the stores.
During 1994, the Company was unsuccessful in renegotiating its office and distribution center lease with its former landlord and elected to reject its office-distribution center lease in its bankruptcy proceedings. As a result, the Company reallocated $7.8 million of the Provision for Facilities Closings for the anticipated costs of rejecting the lease and relocating the office-distribution center. The provision consisted of the $3.5 million negotiated lease rejection cost, losses on the disposal of property and equipment and other expenses associated with the relocation of the Company's headquarters. See the description of the Company's settlement and lease arrangements in Note 9 of "Notes to Financial Statements" in this report, which description is incorporated in this Item 1 by reference.
The costs associated with the closing of the 47 stores and the rejection of the office and distribution center lease, including some future lease obligations, have been incurred during fiscal 1993, 1994 and 1995 and accordingly have been charged against the provision.
During 1994, the Company negotiated favorable terms with its landlords on many of the remaining under-performing stores. As a result, the Company reversed $1.8 million of the Provision for Facilities Closings and Other recorded in 1993. During 1995, the Company settled the remaining disputes with its landlords for less than the amounts accrued and reversed an additional $0.9 million of the reserve.
During 1994, the Company also settled the purported class action lawsuit and recorded a $700,000 provision for such settlement. See the description of the treatment of Class 4 claims in "Chapter 11 Reorganization" and the discussion in Note 3 of "Notes to Financial Statements" in this Report, which information is incorporated in Item 1 by reference.
In addition, during 1994 the Company entered into agreements with certain of its creditors settling their claims for approximately 25% of their legally allowed amounts, which resulted in a $1.6 million reduction in the Provision for Facilities Closings and Other. This amount was included as an extraordinary gain in the Company's Statements of Income (Loss).
At February 3, 1996, the remaining balance of the accrued reserve was approximately $2.4 million.
New Loan Facility and Indenture.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for descriptions of the Company's Indenture relating to the New Notes and the Company's new loan facility.
Management Changes.
In March 1995, Erwin A. Marks, Hannah H. Strasser, Mary Elizabeth Burton and S. Amanda Putnam became directors of the Company. Also in March 1995, George Sheer ceased to be a director of the Company pursuant to the Plan. In June 1995, Joseph Corso resigned as Vice President-Store Operations. Effective April 1996, Anthony Barnett was appointed Vice President-Store Operations.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's business consists of a single industry segment.
MARKETING STRATEGY
The Company's marketing strategy emphasizes quality merchandise, with assortments from which women can build entire wardrobes, personal attention and customer service. It is targeted to satisfying the apparel needs of active, educated, career-oriented, fashion-conscious women, primarily from 30 to late 50 years of age. This strategy is implemented by (i) offering a full range of current, fashionable quality merchandise at moderate to higher price levels; (ii) training sales associates in the skills needed to provide a high level of personal attention and customer service; and (iii) locating its stores primarily in or near more affluent neighborhoods in regional malls which contain at least one traditional upscale department store frequented by its target customers.
Management believes that the typical Gantos customer is a career woman, residing in a two-income, upper-middle to higher income household, who has attended college, has sophisticated fashion taste and has high expectations regarding value and service.
MERCHANDISE
The Company's stores offer a full range of current, quality, fashionable merchandise at moderate to higher prices. Each store carries an edited selection of primarily name brand sportswear (both coordinated groupings and separate tops and bottoms), career dresses and suits, social occasion dresses, accessories, outerwear, swimwear and, in selected stores, shoes. The Company attempts to stock all stores with the same basic merchandise content; however, certain merchandise is varied among stores depending on local trends.
Since the Petition Date, the Company focused its merchandising strategy on a return to the Company's traditional merchandising strategy, including (i) narrowing the mix of merchandise, (ii) reducing the number of vendors and increasing their ability to tailor product, (iii) implementing formal markdown procedures to ensure more current and well-priced product, (iv) stabilizing delivery flow to the stores, (v) reinstituting historical markup policies, and (vi) improving merchandise planning and allocation.
Each of the Company's stores is designed to be a well-organized and complete shopping source for its target customers, providing merchandise to outfit them in casual, work and evening wear, including accessories.
The following table shows the approximate percentage of net sales for major merchandise classifications (other than shoes) for the past three years:
The percentage of net sales accounted for by each merchandise group is affected by pricing, consumer trends and the development and introduction of new fashions. Historical net sales percentages may not be indicative of percentages in future years.
PERSONAL ATTENTION AND CUSTOMER SERVICE
Personal attention is fundamental to the Company's marketing strategy. Gantos sales and desk staff are trained to provide courteous and knowledgeable service to each customer from the time the customer enters the store until the sale is completed, including assisting customers in the coordination of merchandise, advising customers about the latest fashion trends, and helping customers make purchases efficiently. The Company motivates its sales associates through incentives and periodic productivity awards based largely on multiple item sales and sales volume.
SALES TERMS AND CONSUMER CREDIT
The Company accepts cash, checks, third party credit cards and the Gantos credit card. Management believes that offering the Gantos credit card helps convey Gantos' image as an upscale specialty retailer, enhances customer loyalty and provides a large customer list available for targeted advertising promotions on a monthly basis. In 1995, approximately 37% of the Company's sales were made for cash, 32% by third party credit cards and 31% by the Gantos credit card. During 1995, the Company offered its customers a 10% discount on purchases if the customer opened a Gantos charge account as a means of encouraging usage of the Gantos credit card.
A Gantos credit card is offered to customers who qualify for credit based on the Company's established credit criteria. The minimum monthly payment is the greater of $20 or 10% of the unpaid balance of its credit accounts. The Company imposes finance charges at annual rates varying from 18% to 21%, depending upon state laws. During 1995, the Company increased the late fee charge to a maximum of $5 per month. The allowance for doubtful accounts was 2.5% of customer receivables at 1995 year-end compared with 2.4% at 1994 year-end and 3.3% at 1993 year-end. The Company's credit card program may be affected by changes in federal and state consumer credit laws.
Gantos has a liberal return policy, offering merchandise exchanges or refunds for cash or credit on returned merchandise at its stores within 90 days from purchase.
ADVERTISING AND PROMOTION
Gantos relies largely on mall traffic to generate shoppers. In addition, the Company utilizes direct mail advertising. Advertising, primarily by direct mail, informs customers about fashion trends and emphasizes Gantos' fashion image. Direct mail advertising varies in size and format, from postcards and catalogs to inserts and coupons mailed to Gantos credit card customers with their monthly statements.
Gross advertising expenditures in 1995 and 1994 approximated 0.8% and 0.7% of net sales, respectively. The increase in gross advertising costs in 1995 compared to 1994 is due to the production of two additional mailers during the year. A significant part of advertising costs are paid by vendor contributions. Such vendor contributions are subject to change or cancellation at each vendor's sole discretion from year to year.
STORES
The Company's stores are primarily located in enclosed regional malls which contain at least one traditional upscale department store frequented by the Company's target customers. A few stores are located in major urban office- shopping centers which are typically located near at least one such department store. Store interiors are designed to convey a warm, elegant feeling. Merchandise is attractively arranged by department classifications, rather than vendor, and is displayed in coordinated groups on fixtures designed to allow the customer easy access to purchase complete outfits. The merchandise set and visual display are centrally administered by Gantos management.
Gantos operates four clearance stores (Bargain Boutiques) which are located in Illinois (Countryside) and Michigan (one each in Grand Rapids, Kalamazoo and Livonia). The clearance stores feature marked-down merchandise, which comes primarily from Gantos stores.
The following table sets forth information concerning sales per store and per square foot (sales include shoe sales and exclude license fees from shoe departments) for stores open in the last three years:
Store hours are generally determined by the mall in which the store is located. Most stores are open seven days and six nights a week, except major holidays.
LEASED DEPARTMENTS AND CATALOG OPERATIONS
At 29 midwestern stores, a portion of the selling space is licensed to an unaffiliated party which operates a shoe department. Fees received by Gantos from the shoe department licensee (included in net sales) were approximately $789,000 in 1995, $761,000 in 1994 and $844,000 in 1993.
NUMBER OF STORES AND LOCATION
Prior to February 1991, Gantos grew both through increased sales volume from existing stores and from new stores. The decline in fiscal 1995, 1994 and 1993 sales was the result of decreased comparable store sales and the closing of 48 stores. Sales growth in 1991 and 1992 was largely the result of increased comparable store sales. The following table sets forth information with respect to store openings and closures since the end of fiscal 1983:
As part of the Chapter 11 restructuring, the Company closed 2 stores in 1995 in addition to the 46 stores closed since the bankruptcy filing. The stores closed in 1995 were located in New York and Illinois. In 1995, the Company opened one new store in New York. The Company plans to open one to three new stores in 1996. As a result, any future sales growth is expected to come from comparable store sales growth.
The following table shows the geographic distribution of the Company's stores by state for the 113 stores open as of April 15, 1996.
Capital expenditures for 1995 were incurred primarily to remodel and refixture 21 existing stores, to pay the balance for and install a new register and information control system and to open one new store. The Company expects that approximately $6.0 million will be required for capital expenditures in 1996, principally for remodeling and refixturing 20 to 25 existing stores and to open one to three new stores.
DISTRIBUTION, SUPPLIERS AND PURCHASING
The majority of the merchandise purchased by the Company from vendors is delivered by the vendors to the Company's East coast or West coast "consolidator". Each consolidator stages the merchandise it receives for shipment and arranges for delivery to the Company's distribution center in Grand Rapids, Michigan. Merchandise not shipped through a consolidator is delivered directly to the distribution center. Merchandise is then inspected, ticketed, allocated and shipped to the Company's various stores. The Company generally does not warehouse merchandise, but distributes it promptly to stores. The Company does warehouse damaged items awaiting return to vendors and a portion of selected merchandise for later allocation to stores in which such items are selling more rapidly than in other stores. Shipments are made to the stores via common carrier.
All of the products sold by Gantos are purchased directly from manufacturers. The Company's purchasing strategy is to buy, where possible, substantial quantities of quality merchandise from selected manufacturers to whom the Company is an important customer. All purchasing decisions are made centrally based on detailed merchandising plans. No manufacturer accounted for more than 10% of the Company's purchases during any of the last three fiscal years. The Company does not maintain any long-term or exclusive commitments or arrangements to purchase from any manufacturer. The Company supplements some of its merchandise lines with private label merchandise.
Management believes that the Company is one of the larger customers (based on purchase volume) of a number of its suppliers. Gantos works closely with its suppliers, keeping them informed of selling trends and helping them develop merchandise lines and production schedules. The Company will require continued planning and development of close working relationships with suppliers to continue obtaining adequate supplies of quality merchandise on favorable terms. To diminish the risk of not obtaining satisfactory additional supplies of merchandise, the Company is continually exploring possible additional resources for merchandise supply, including other recognized domestic labels, private label merchandise (manufactured domestically and overseas) and foreign manufacturers. There is no assurance that the Company will be able to continue to purchase merchandise from preferred vendors in the quantities and on the terms its desires.
Management believes that its purchasing power has not been weakened since the emergence from Chapter 11.
INFORMATION AND CONTROL SYSTEMS
During 1994, the Company received authorization from the Bankruptcy Court to purchase new point of sale registers and a micro processor to process information entered at the registers. This system was fully installed and operational in May 1995. The integrated computer information system provides the Company with financial, merchandise, inventory, personnel, credit, analytical and other information concerning its business. This system includes several point-of-sale registers in each store, which are connected on-line with the Company's corporate computers via satellite. This network, which allows for in-house processing of most of the Company's data processing needs, is used to communicate with the stores and capture all sales transactions, Gantos credit card authorizations, data collections by corporate computers and third party bankcard authorizations.
The system provides Gantos buyers with timely selling information by vendor, style, color and size and assists in the distribution to each store of required merchandise. Buyers use this information to plan and budget inventory monthly by department and analyze the profitability and turnover of merchandise as well as local consumer tastes. The system monitors the selling rate of merchandise by classification. It also calculates markdowns at specified intervals based upon standards established for each merchandise classification, which are then reviewed by management.
The system maintains over 733,000 customer charge accounts (approximately 268,000 of which are active) and generates monthly customer statements and financial reporting. The system also provides information to help management schedule, compensate and evaluate employees.
The Company takes a complete physical inventory at least two times per year to determine actual cost of merchandise sold. Inventory shrinkage, at cost, as a percentage of net sales was 1.5% in 1995, 1.5% in 1994 and 2.0% in 1993. The decrease in shrinkage expense as a percentage of net sales is the result of the Company's increased emphasis on shrinkage control and its loss prevention program.
TRADEMARKS AND SERVICE MARKS
The Company has registered the names "Gantos," "Bargain Boutique," "Your Most Fashionable Shopping Address" and "Sale For All Seasons" as service marks and its logo as a trademark with the United States Patent and Trademark Office. Registration of these service marks is renewable indefinitely. The Company is not aware of any adverse claims concerning its names or marks.
EMPLOYEES
As of February 3, 1996, the Company had 2,106 employees. This total consists of 630 full-time employees and 1,476 part-time employees. The full-time employees consist of 340 salaried employees and 290 hourly employees. Of the full-time, hourly employees, 145 were salespersons who receive incentives in addition to their hourly wages. Gantos employs additional part-time personnel as needed throughout the year.
Management believes that its employees are paid competitively compared to industry standards. All employees receive discounts on Gantos merchandise, and most full-time employees are entitled to life insurance, medical, dental and disability coverage and are eligible to participate in a 401(k) plan. All Gantos employees are non-union. The Company considers its relationship with its employees to be good.
COMPETITION
The women's retail apparel business is highly competitive, with quality, price, service and fashion being the principal competitive factors. The Company's principal competitors include women's apparel specialty stores, department stores and off-price apparel stores. Many competitors are national or regional chains which are considerably larger than the Company and have substantially greater financial and other resources.
SEASONALITY
The Company's business is seasonal, with its highest and second highest sales volumes and net income levels historically being in the Christmas and spring seasons, respectively. The following tables set forth the Company's net sales and net income (loss) per fiscal quarter for 1995 and 1994, on an unaudited basis and including the results of store closings and new store openings:
Because of the importance of the Christmas season, sales and operating results for any quarter are not necessarily indicative of results for the year. The Company's working capital and cash demands are seasonal, increasing in the fall when inventories are being increased for the Thanksgiving/Christmas seasons.
ITEM 2.
ITEM 2. PROPERTIES
The Company's stores are located primarily in the West, Midwest and Northeast portions of the United States. Gantos' regular priced merchandise stores range in size from 5,000 to 13,000 square feet, with most stores within the chain ranging from 5,000 to 11,000 square feet. Boutiques range in size from 10,000 to 18,000 square feet. The average size of the Company's stores is approximately 8,000 square feet, with approximately 91% of this area representing selling space.
The Company leases all of its stores. Most store leases contain fixed rental provisions and generally leases contain rental payment provisions based on a percentage of sales. Most leases also require payment of insurance, real estate taxes and other charges (such as advertising, maintenance and merchants' association charges) which are subject to escalation clauses. During 1995, total store rent under these leases was approximately $14.3 million, of which $0.1 million was percentage rent. The Company owns substantially all of the equipment in its stores.
The following table shows the years in which leases on stores in operation at April 15, 1996 expire:
The Company leases approximately 50,000 square feet of a 150,000 square foot office center and approximately 126,000 square feet of an adjacent 154,000 square foot distribution center in Grand Rapids, Michigan from VRB Corp., an affiliate of Comerica Bank. The Company believes that its office-distribution center is larger than is required to serve its existing chain of stores and to accommodate planned future business volume.
As of April 1, 1995, the Company entered into a 10-month lease with VRB Corp. In October 1995, the Company exercised its option to extend the current lease with VRB Corp. for 6 months which will expire July 31, 1996, with base annual rent of $1,030,000 (including real estate taxes) plus insurance and maintenance.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a number of pending lawsuits and claims which are ordinary, routine suits and claims incidental to its business. In the opinion of management, the disposition of these actions will not have a material adverse effect upon the Company's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 10 of this Annual Report on Form 10-K.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common shares of Gantos, Inc. are traded over-the-counter and are quoted on The Nasdaq National Market under the symbol GTOS.
The table below sets forth the high and low closing sale prices for the Company's common shares as reported by Nasdaq for 1995 and 1994, as adjusted to give effect to the issuance of one new common share for every two common shares outstanding before March 31, 1995, pursuant to the Plan.
The number of shareholders of record of the Company's common shares as of April 15, 1996 was 1,339.
The Company has never paid cash dividends on its common shares. The Company expects that for the foreseeable future it will follow a policy of retaining earnings to finance the development of its business, including for working capital and to fund capital expenditures. For a description of financial covenants in the Company's loan agreement that may restrict dividend payments, see Note 7 of "Notes to Financial Statements".
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA 5-Year Summary and Selected Financial Data (Thousands, except per share data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
As an aid to understanding the Company's operating results, the following tables indicate the percentage relationships to net sales of various revenue and expense items included in the Statements of Income (Loss) for 1995, 1994 and 1993 (fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively) and the percentage changes in the dollar amounts of those items for such years.
1995 COMPARED TO 1994
Net sales decreased approximately 2%, or approximately $4.5 million, from 1994 to 1995. The decrease was due primarily to a decrease in net sales for stores in operation throughout both periods of approximately $4.6 million, partially offset by an increase of $2.6 million resulting from an additional week of sales experienced during this fiscal year as a result of the fifty-three week retail calendar. Net sales also decreased approximately $3.2 million as a result of closing two stores during 1995 and five stores during 1994, partially offset by approximately $0.7 million in additional sales as a result of one new store opening during 1995 and one new store opening during the fourth quarter of 1994. The 2.4% decrease in comparable store sales (excluding the 53rd week of 1995) was comprised of a 5.4% decrease in average sales dollars per unit, a 0.1% decrease due to a change in merchandise mix, and a 3.1% increase in unit sales. The increase in unit sales and decrease in average sales dollars are primarily the result of the Company's increased unit sales in moderate price classifications, partially offset by lower markdown expenses as a percentage of sales. The Company plans to open one to three new stores in 1996. Future sales increases are expected to come largely through comparable store sales growth.
Cost of sales, as a percent of net sales, decreased to 78.8% in 1995 from 81.3% in 1994. The decrease was primarily due to lower net markdowns taken in 1995 compared to 1994, lower net merchandise costs incurred and a substantial decrease in distribution and store occupancy costs (primarily lower store rent expense and maintenance and dues expense), as a result of favorable lease negotiations with store landlords.
Selling, general and administrative (SG&A) expense decreased approximately $0.1 million from 1994 to 1995. The decrease was primarily due to reductions in computer outsourcing fees, depreciation and corporate rent and a $0.6 million credit for the settlement of the remaining liabilities subject to compromise for less than the amounts accrued, partially offset by higher payroll and bad debt expenses during 1995 compared to 1994 and a $0.7 million loss as a result of adoption of Statement of Financial Accounting Standards (SFAS) No. 121. SG&A expense, as a percent of net sales, increased from 20.3% to 20.7% during 1995 as a result of lower retail sales. During the fourth quarter of 1995, the Company adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". As a result, an impairment loss of $0.7 million (0.4% of sales) was recorded under SG&A expense. See the description of SFAS No. 121 in Note 5 of "Notes to Financial Statements" in this Report, which description is incorporated in this Item 7 by reference.
Finance charge and other revenue, as a percent of sales, decreased to 2.3% this year compared to 2.5% last year. Finance charge income decreased due to a decrease in average outstanding credit card receivables during 1995 compared to 1994, partially offset by increased late charge fees in 1995. The decrease in the receivable balances is primarily the result of faster payment by customers and lower credit card sales.
During 1995, the Company recorded a credit for Facilities Closings and Other of $0.9 million. During 1995, the Company settled the remaining disputes with its landlords for less than the amounts accrued. For a description and discussion of the Provision for Facilities Closings and Other, see Note 4 of "Notes to Financial Statements" in this Report, which description is incorporated in this Item 7 by reference.
Interest expense increased approximately $2.2 million in 1995 compared to 1994. The increase is the result of the Company's emergence from Chapter 11 effective March 31, 1995. As part of the Plan of Reorganization, the Company entered into a new revolving credit agreement with NatWest Bank and issued $12.4 million in notes under an indenture agreement. For a description of the NatWest Facility and of the notes issued under the indenture, see Note 7 of "Notes to Financial Statements" in this Report, which description is incorporated in this Item 7 by reference. Both the revolving credit agreement and notes accrued interest for ten months during 1995. In the prior year, during the Chapter 11 proceedings, the Company was not required to pay interest on its unsecured or undersecured pre-petition debts.
Interest income and professional fees, shown separately under "Reorganization Items" in the Statements of Income (Loss), decreased in 1995 compared to 1994 as a result of the Company's emergence from Chapter 11 during the year and payments made to creditors under the plan.
The Company did not record a provision for taxes during 1995 or 1994 due to the availability of net operating loss carryforwards.
These factors resulted in net income of $3.7 million, or $0.55 per share, in 1995 compared to net income of $2.6 million, or $0.97 per share, in 1994. The net income for 1995 includes a credit of $0.9 million to Facilities Closing and Other, and a charge of approximately $0.7 million as a result of the early adoption of SFAS no. 121. The net income for 1994 includes a net credit of $1.1 million to Facilities Closing and Other and an extraordinary item - gain on extinguishment of debt in the amount of $1.6 million. As part of the Plan, each shareholder of record on March 31, 1995 is entitled to receive one common share for every two common shares previously held. All stock related data above reflect this stock distribution for all periods presented.
1994 COMPARED TO 1993
Net sales decreased approximately 14%, or approximately $32.1 million, from 1993 to 1994. Of the $32.1 million decrease in net sales, $30 million was attributed to the closing of 46 stores since the Petition Date, as part of the Company's plan to realign its operations by downsizing the chain, partially offset by reopening one of the previously closed stores in the third quarter of 1994. The remaining $2.1 million decrease in net sales was attributed to a decrease in net sales for stores in operation throughout both periods. Excluding the 45 net closed stores, net sales decreased 0.6% during 1994. The 0.6% decrease was comprised of a 4.1% decrease in average sales dollars per unit and a 0.2% decrease due to a change in merchandise mix, partially offset by a 3.7% increase in unit sales. The increase in unit sales and decrease in average sales dollars per unit was primarily due to a return to a more moderate price point in 1994 compared to 1993, partially offset by reduced markdowns as a percentage of sales during 1994 compared to 1993 and lower sales of higher-priced merchandise such as coats, suits and career sportswear.
Cost of sales, as a percent of net sales, decreased to 81.3% in 1994 from 89.7% in 1993. The decrease was primarily due to lower net merchandise markdowns taken in 1994 compared to the aggressive markdown strategy adopted in 1993, a decrease in store occupancy costs in 1994 compared to 1993 due to closing 45 under-performing stores and lower shrinkage costs in 1994.
Selling, general and administrative (SG&A) expense decreased $6.9 million, or 15%, in 1994 compared to 1993. The decrease was primarily due to closing 46 stores since the Petition Date resulting in significant reductions in payroll, other taxes, maintenance and dues, supplies, depreciation and utilities. In addition, other expenses decreased as a result of cost control measures, lower bad debt expenses as a result of a decline in average outstanding receivables and better collection efforts and a reduction in advertising expense. As a result of the bankruptcy proceedings, the Company incurred increased professional fees and administrative costs. These expenses were classified separately under "Reorganization Items" in the Statements of Income (Loss). Selling, general and administrative expense as a percent of net sales, decreased from 20.5% to 20.3%.
Finance charge and other revenue, as a percent of net sales, decreased to 2.5% during 1994 compared to 2.9% in 1993. Finance charge income decreased due to a decrease in average outstanding credit card receivables during 1994 compared to 1993. The decrease in the receivable balances was due to faster payments by customers and to lower Gantos credit card sales resulting from the net closing of 45 stores from the Petition Date through the end of 1994. The impact of the decrease in the number of stores operating was partially offset by an increase in Gantos credit card sales as a percent of total sales from 27% in 1993 to 30% in 1994 as a result of renewed promotional efforts in 1994.
During 1994, the Company negotiated favorable terms with its landlords on many of the remaining under-performing stores. As a result, the Company reversed $1.8 million of the Provision for Facilities Closings and Other recorded in 1993. In addition, the Company reallocated $7.8 million of the reserve to cover the costs of the corporate office and distribution center as described below.
During 1994, the Company was unsuccessful in renegotiating its office and distribution center lease with its present landlord and elected to reject its office-distribution center lease during the bankruptcy proceedings. As a result, the Company reallocated $7.8 million of the Provision for Facilities Closings for the anticipated costs of rejecting the lease and relocating the office-distribution center. The provision consists of the negotiated lease rejection cost, losses on the disposal of property and equipment and other expenses associated with the relocation of the Company's headquarters. See the description of the Company's settlement and lease arrangements in Note 9 of "Notes to Financial Statements" in this Report, which description is incorporated in this Item 7 by reference.
In addition, the Company recorded a $0.7 million Provision for Facilities Closings and Other representing the Company's share of the costs of settling the purported class action lawsuit. See the description of the treatment of Class 4 claims in "Recent Developments - Chapter 11 Reorganization" and the discussion in Note 3 of "Notes to Financial Statements" in this Report, which information is incorporated in this Item 7 by reference. For a description of the Provision for Facilities Closings and Other, see Note 4 of "Notes to Financial Statements" in this Report, which description is incorporated in this Item 7 by reference.
Interest expense decreased approximately $1.7 million from 1994 to 1993. The decline was a result of the Company ceasing to accrue interest on any obligation subject to compromise during 1994. Under the Federal Bankruptcy Code, the Company was not required to pay interest during its Chapter 11 proceedings on unsecured or undersecured prepetition debt. Contractual interest for 1994 would have been $3.7 million. The interest expense incurred for 1994 primarily represented the accrued commitment and letter of credit fees under the DIP Facility. As of March 31, 1995, the effective date of the Plan, the Company was again required to pay interest on its outstanding indebtedness.
Interest income increased in 1994 compared to 1993 as a result of cash accumulated during the Chapter 11 proceedings. This amount is shown separately under "Reorganization Items" in the Statements of Income (Loss). Professional fees incurred as a result of the Chapter 11 filing are also shown separately under "Reorganization Items" in the Statements of Income (Loss).
The Company recorded a $1.6 million extraordinary gain as a result of settlement agreements with certain creditors. In exchange for early cash payments, certain of the Company's creditors agreed to settle their claims for approximately 25% of their legally allowed amounts, which resulted in forgiveness of indebtedness income. This income has been included as an extraordinary gain in 1994 in the Company's Statements of Income (Loss).
The Company did not record a provision for taxes during 1994, due to the reversal of a portion of established deferred tax asset valuation allowances.
These factors resulted in a net income for 1994 of $2.6 million, or $0.97 per share, compared with a net loss of $43.1 million, or $16.14 per share, in 1993. The net income for 1994 includes a net credit of $1.1 million to Facilities Closing and Other and an extraordinary item - gain on extinguishment of debt in the amount of $1.6 million. The net loss for 1993 includes a $29.3 million Provision for Facilities Closings and Other, partially offset by $1.2 million in income as a result of the cumulative effect of change in accounting method. As part of the Plan, each shareholder of record on March 31, 1995 was entitled to receive one common share for every two common shares previously held. All stock related data above reflect this stock distribution for all periods presented.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal needs for liquidity are to finance the purchase of merchandise inventories, support its accounts receivable and fund its debt payment obligations and operations. Merchandise purchases vary on a seasonal basis, peaking in the fall. Accounts receivable also vary on a seasonal basis, peaking during the holiday season.
Total capital expenditures during 1995, 1994 and 1993 were $6.1, $3.9 and $2.1 million, respectively. Capital expenditures for 1995 were incurred primarily to open one new store, remodel and refixture 21 existing stores and to pay the balance for and install a new register and information control system. Capital expenditures for 1996 are estimated to be $6.0 million. These amounts are expected to be used primarily to remodel and refixture approximately 20 to 25 existing stores and to open one to three new stores in 1996. Capital expenditures for 1996 are expected to be financed primarily from funds generated from operations.
Net cash provided by operating activities before reorganization items totaled $14.4 million in 1995 compared to $20.8 million in 1994. The decrease was primarily due to (i) a smaller reduction in accounts receivable as a result of more store closings in 1994 than in 1995, (ii) an increase in merchandise inventories compared to a decrease in the prior year, (iii) the Company collecting an income tax refund in 1994 whereas no such collection occurred in 1995, (iv) an increase in cash used for store closings and other, and (v) the increase in prepaid expenses in 1995 compared to a reduction in 1994 and a smaller increase in accrued expenses in 1995 as a result of the timing of payments. These factors were offset somewhat by an increase in net income (net of non-cash items included in the determination of earnings including the provision for facilities closing and other, the extraordinary item, and depreciation expense).
Net cash used by reorganization items during 1995 was approximately $33.1 million, compared to net cash used by reorganization items of $35.9 million in 1994. In addition to the reorganization items discussed in "Results of Operations", the Company used approximately $31.6 million of cash to pay the remaining liabilities subject to compromise, including secured, unsecured and administrative claims, and approximately $1.4 million in cash to pay accrued bankruptcy expenses. Pursuant to the Plan, during 1995, the Company used $31,868,000 of its cash, issued approximately $12,395,000 in original principal amount of six-year notes payable, bearing interest at 12.75% a year, and issued or committed to issue approximately 4,735,000 Common Shares (valued for this purpose at $4.16 a share), in payment of approximately $58,255,000 of its liabilities subject to compromise, $5,192,000 in long-term debt and $514,000 of accrued expenses, including the settlement costs of the purported class action lawsuit. For a description of the classification and treatment of claims under the Plan, see "Recent Developments -- Chapter 11 Reorganization" in Item 1 of this Report, which information is incorporated in this Item 7 by reference.
The New Notes were issued pursuant to an Indenture, dated as of March 1, 1995, between the Company and Shawmut Bank Connecticut, National Association (the "Indenture"). Pursuant to the Indenture, the New Notes are payable in 16 quarterly installments of approximately $774,725 beginning July 1, 1997 and ending April 1, 2001. The New Notes are also subject to prepayment within 50 days after the end of each fiscal year of the Company in an amount equal to the Company's "Excess Cash Flow". Excess Cash Flow is 50% of the Company's "Free Cash Flow" in excess of $1.4 million in 1995, $3.5 million in 1996, $3.4 million in 1997, $2.4 million in 1998, and $4.3 million in 1999. Free Cash Flow is the Company's net income before extraordinary items, plus depreciation expense, minus specified capital expenditures and principal payments made with respect to indebtedness for borrowed money (other than the quarterly payments with respect to the New Notes and payments under the NatWest Facility). The Excess Cash Flow payment for 1995 was $455,000. If Excess Cash Flow payments are not at least $2.25 million by March 31, 1997, the Company must pay the shortfall. The Company must also prepay the New Notes with the proceeds of specified asset and securities sales.
The New Notes are secured by a $5,000,000 life insurance policy on the life of L. Douglas Gantos until they are transferred to a third party. The New Notes secured by the policy must be prepaid with any proceeds from the life insurance
policy. The New Notes bear interest at 12.75% payable quarterly. The Indenture contains, among other things, covenants with respect to (i) additional indebtedness, (ii) capital expenditures, (iii) minimum net worth, (iv) earnings before interest, taxes, depreciation and amortization, (v) interest coverage ratios, and (vi) prohibitions on paying dividends.
Net cash used by financing activities in 1995 was approximately $287,000 compared to net cash used by financing activities of $711,000 in 1994. The payments in both years primarily represent the cost of obtaining the revolving credit agreement.
As part of the Plan, the Company entered into a three-year borrowing agreement with NatWest Bank and LaSalle National Bank (the "NatWest Facility") expiring March 31, 1998. The NatWest Facility provides the Company revolving credit loans and letters of credit up to $40 million, subject to a borrowing base formula and lender reserves (as defined in the agreement). Undrawn and unreimbursed letters of credit under the facility may not exceed $4 million in face amount, and the initial funding under the facility could not exceed $19 million. The NatWest Facility is expected to be used to provide for the Company's working capital requirements.
Loans under the NatWest Facility bear interest at NatWest's prime rate plus 1- 1/4%, or, at the Company's option, the reserve adjusted LIBOR rate plus 2-1/2%. The interest is payable in arrears on the last business day of each month for prime rate loans and on the last day of the applicable one, two, three or six-month interest period or at the end of three months, whichever is sooner, for the reserve adjusted LIBOR rate loans. After March 31, 1996, the agreement provides for a potential decrease in interest rates, depending on the financial performance of the Company (as described in the NatWest Facility). The NatWest Facility carries commitment fees of 1/2% of the difference between $40 million and the average amount outstanding under the facility (including the face amount of letters of credit) and 1.75% of the face amount of outstanding letters of credit. This loan is secured by substantially all of the Company's assets. As of April 15, 1996, the Company had no borrowings under this facility, approximately $235,000 in letters of credit outstanding, and $32.5 million available for borrowing.
The NatWest Facility contains, among other things, covenants with respect to (i) additional indebtedness, (ii) investments, (iii) capital expenditures, (iv) minimum net worth, (v) fixed charge coverage ratios, (vi) earnings before interest, taxes, depreciation and amortization, (vii) interest coverage ratios, (viii) inventory turnover ratios, and (ix) prohibitions on paying cash dividends.
The Company expects its cash flow from operations and borrowings under the NatWest Facility to be sufficient to meet its capital expenditure and working capital requirements and its other needs for liquidity during 1996.
INFLATION
The Company does not believe that inflation has had a material effect on the results of operations during the past three years.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and other information required by this item are set forth in the "Index to Financial Statements" on page 28 of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company will be set forth under the caption "VOTING SECURITIES AND PRINCIPAL HOLDERS" and under the caption "ELECTION OF DIRECTORS" in the Company's Proxy Statement in connection with the 1996 Annual Meeting of Shareholders scheduled to be held June 20, 1996, and is incorporated herein by reference. Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 will be set forth under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement in connection with the 1996 Annual Meeting of Shareholders scheduled to be held June 20, 1996, and is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information as of April 22, 1996, regarding the Company's executive officers:
L. Douglas Gantos has been the Company's President, Chief Executive Officer and Chairperson of the Board since August 1993. 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. Pursuant to a letter agreement, dated as of March 27, 1995, as amended March 19, 1996, Mr. Gantos is to be employed as Chief Executive Officer and Chairperson of the Board until the earlier of (i) 90 days after written notice from Mr. Gantos or the Company, and (ii) 60 days after the Company hires a Chief Operating Officer that the Company's Board of Directors determines might become the Company's Chief Executive Officer. Pursuant to the letter agreement, Mr. Gantos will also serve as a part-time Chairperson of the Board or a consultant to the Company until four years after he ceases to be the Company's Chief Executive Officer. The Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code on November 12, 1993. Mr. Gantos was an executive officer of the Company at the time of the filing.
Kenneth Green has been the Company's Vice President, General Counsel and Secretary since December 1993. From July 1992 to December 1993, Mr. Green served as Director of Legal Services and Secretary for the Company. From November 1989 until July 1992, Mr. Green was Director of Legal Services for the Company.
J. E. Bunka has been the Company's Vice President - Finance, Chief Financial Officer and Treasurer since April 1994. From December 1993 to April 1994, Mr. Bunka was Vice President - Finance, acting Chief Financial Officer and Treasurer for the Company. In November 1993, Mr. Bunka was employed by Embrace Systems Midwest, Inc. From July 1992 until November 1993, Mr. Bunka was the Controller - Principal Accounting Officer for the Company. From April 1991 until July 1992, Mr. Bunka was the Assistant Controller - Principal Accounting Officer for the Company. From December 1988 until April 1991, Mr. Bunka was the Director of Planning and Corporate Development for the Company. Pursuant to a letter agreement, dated as of December 13, 1993, Mr. Bunka is to be employed at will as the Company's Vice President and Chief Financial Officer.
Gordon Tendler was named Vice President, General Merchandise Manager for Sportswear, Coats and Suits effective November 28, 1994. From June 1994 to November 1994, Mr. Tendler was an independent retail consultant. From July 1993 to May 1994, Mr. Tendler was President of Audrey Jones Inc. (which filed for protection under Chapter 11 of the Bankruptcy Code in December 1993), a women's specialty retail company. From May 1987 to June 1993, Mr. Tendler was Executive Vice President, General Merchandise Manager of Audrey Jones. Pursuant to a letter agreement, dated November 2, 1994, Mr. Tendler is to be employed at will
as the Company's Vice President, General Merchandise Manager for Sportswear, Coats and Suits.
Jane Pahls was named Vice President, General Merchandise Manager for Dresses and Accessories effective November 28, 1994. Ms. Pahls was Gantos' Senior Divisional Merchandise Manager for Dresses, Suits, Coats and Accessories from July 1, 1993 to November 1994. From May 1992 to July 1993, Ms. Pahls was employed as Vice President for the Dress Division for Winkleman's specialty stores based in Plymouth, Michigan. Prior to her employment at Winkleman's, Ms. Pahls was a Gantos employee from 1983 to May 1992. Ms. Pahls began with Gantos as a Buyer in July 1983 and was promoted to Merchandise Manager in February 1987.
Anthony Barnett has been the Company's Vice President - Store Operations since April 19, 1996. From July 1994 through April 1996, Mr. Barnett was a District Manager for Mervyns Department Stores. From 1993 through July 1994, Mr. Barnett was the Regional Director of Stores for Sunglass Hut of America, a specialty retail company. From 1988 through 1993, Mr. Barnett was employed as a Regional Manager with The Limited, Inc., a women's specialty retail company. Pursuant to a letter agreement, dated March 15, 1996, Mr. Barnett is to be employed at will as the Company's Vice President - Store Operations.
Executive officers are elected annually by the Board of Directors and serve at the pleasure of the Board.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be set forth under the caption "EXECUTIVE COMPENSATION" in the Company's Proxy Statement in connection with the 1996 Annual Meeting of Shareholders scheduled to be held June 20, 1996, and, except for the information under the caption "BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION" or "PERFORMANCE GRAPH", is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of certain beneficial owners and management will be set forth under the caption "VOTING SECURITIES AND PRINCIPAL HOLDERS" and "ELECTION OF DIRECTORS" in the Company's Proxy Statement in connection with the 1996 Annual Meeting of Shareholders scheduled to be held June 20, 1996, and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will be set forth under the caption "CERTAIN TRANSACTIONS" or "EXECUTIVE COMPENSATION- COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in the Company's Proxy Statement in connection with the 1996 Annual Meeting of Shareholders scheduled to be held June 20, 1996, and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a)(1) Financial Statements
The list of the report, financial statements and notes required by this Item 14(a)(1) is set forth in the "Index to Financial Statements" on page 28 of this Report.
14(a)(2) Financial Statement Schedules
The Financial Statement Schedule required by this Item 14(a)(2) is set forth in the "Index to Financial Statements" on page 28 of this Report.
14(a)(3) Exhibits
The list of exhibits required by this Item 14(a)(3) is set forth in the "Index to Exhibits" on pages 45 to 48 of this Report.
14(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter ended February 3, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 24, 1996
GANTOS, INC. (Registrant)
By /s/ J. E. BUNKA ------------------------------ J. E. BUNKA Its: Vice President - Finance and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
GANTOS, INC.
Page ----
Report of Independent Accountants, Price Waterhouse LLP............... 29
Financial Statements
Statements of Income (Loss) for the three years ended February 3, 1996.............................. 30
Balance Sheets as of February 3, 1996 and January 28, 1995............................................ 31
Statements of Cash Flows for the three years ended February 3, 1996.................................... 32
Statements of Changes in Shareholders' Equity for the three years ended February 3, 1996...................... 33
Notes to Financial Statements.....................................34-42
Quarterly Financial Information (unaudited)........................... 43
Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts.................. 44
Report of Independent Accountants
To the Board of Directors and Shareholders of Gantos, Inc.
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Gantos, Inc. at February 3, 1996 and January 28, 1995, and the results of its operations and cash flows for each of the three years in the period ended February 3, 1996 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 7 to the Financial Statements, the Company changed its method of accounting for income taxes in fiscal 1993. In 1995, the Company changed its method of accounting for long-lived assets to conform with Statement of Financial Accounting Standards No. 121 as discussed in Note 5.
Price Waterhouse LLP
Detroit, Michigan February 29, 1996
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Chapter 11 Reorganization and Basis of Presentation:
On November 12, 1993 (the "Petition Date"), Gantos, Inc. and Gantos Stores, Inc. (collectively referred to as "Debtor" or "Company") filed petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Western District of Michigan (the "Bankruptcy Court"). The Company managed its affairs and operated its business under Chapter 11 as a debtor-in-possession while a plan of reorganization was formulated.
Through a reorganization under Chapter 11, management restructured the operations and capitalization of the Company in order to strengthen the Company's financial position and operating performance.
On January 19, 1995, the Company filed the Second Amended Joint Plan of Reorganization of Gantos, Inc. and Gantos Stores, Inc. (as amended March 7, 1995, the "POR"). On March 7, 1995, the Bankruptcy Court confirmed the POR which became effective March 31, 1995.
Pursuant to the POR, the former Gantos, Inc. merged into the Company (formerly known as Gantos Stores, Inc.) which changed its name to Gantos, Inc.
As provided for in the POR, all holders of secured and priority claims received cash equal to the allowed amount of such claims, and unsecured creditors generally received 50% of the allowed amount of each claim in cash and 50% of the allowed amount of each claim in new common shares valued at $4.16 per share. Certain unsecured creditors received approximately $12.4 million in original principal amount of 6-year notes bearing interest at 12.75%.
The Company issued 4,735,000 common shares, and paid approximately $31,567,000 in cash along with the notes as settlement for these claims. All holders of old common shares received one new common share for every two old common shares outstanding prior to March 31, 1995.
Prior to the March 31, 1995 effective date of the POR, the Company followed the American Institute of Certified Public Accountants (AICPA) Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". After the March 31, 1995 effective date, the Company's assets and liabilities continued to be recorded at their historical basis.
2. Summary of Significant Accounting Policies:
Industry Information - The Company operates 113 women's apparel specialty stores in 23 states located primarily in the Western, Midwestern and Northeastern United States. The following is a summary of significant accounting policies:
The Company's fiscal year ends on the Saturday closest to the end of January. Fiscal year 1995 consisted of fifty-three weeks and ended on February 3, 1996; Fiscal years 1994 and 1993 consisted of fifty-two weeks and ended on January 28, 1995, and January 29, 1994, respectively.
For purposes of the Statements of Cash Flows, the Company considers all highly liquid investment instruments purchased with a maturity of three months or less to be cash equivalents.
Non-cash financing charges in connection with the Company's POR, including the issuance of long-term debt and additional common stock, are described in Note 1 above.
Accounts receivable consists principally of Gantos credit card customer receivables. Finance charges are imposed on the unpaid balance at annual rates varying from 18% to 21% depending upon state laws. Minimum monthly payments of $20 or 10% of the unpaid balance, whichever is greater, are required.
Merchandise inventories are valued at the lower of cost or market, using the cost method, on the First-in, First-out (FIFO) basis. Approximately $1.2 and $1.1 million of merchandise procurement, storage and distribution costs are included in inventory at year end 1995 and 1994, respectively.
Commissions earned on leased shoe sales are included in net sales and totaled $789,000 in 1995, $761,000 in 1994 and $844,000 in 1993. Third party leased shoe sales totaled $6.3, $6.1 and $6.7 million in 1995, 1994, and 1993, respectively.
Cost of sales includes the net cost of merchandise, buying, distribution and occupancy expenses.
Depreciation and amortization are computed using the straight-line method. Furniture and fixtures are depreciated over their estimated useful lives, generally five to ten years. Leasehold improvements are amortized over the terms of the respective leases or their estimated useful lives, whichever is shorter, generally seven to ten years.
The Company expenses preopening costs of new stores in the year in which the store is opened.
Advertising costs are expensed the first time the advertising takes place. Net advertising expense approximated $1.0 million, $0.9 million and $1.5 million in 1995, 1994 and 1993, respectively.
As part of the Company's POR, each shareholder of record on the effective date is entitled to receive one new common share for every two common shares previously held. All share and per share data in the financial statements and notes reflect this stock distribution for all periods presented. As part of the POR, the Company issued 4,567,00 common shares as partial settlement for certain claims, 177,000 restricted common shares to management (net of 23,000 restricted common shares forfeited during 1995) and 168,000 common shares as partial settlement of a shareholder lawsuit.
Income (loss) per share is computed using the weighted average number of common shares and common share equivalents outstanding during the year. The weighted average number of common shares and common share equivalents outstanding was 6,759,000 in 1995, 2,665,000 in 1994, and 2,669,000 in 1993.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain amounts from the prior year have been reclassified to conform with the presentation used in the current year.
3. Class Action Lawsuit:
On March 16, 1994, a shareholder of the Company (the Plaintiff) filed a purported class action lawsuit in the United States District Court for the Western District of Michigan, against certain current and former Officers and Directors of the Company (the Defendants). The lawsuit claimed that the Defendants caused the Company to issue statements containing material misstatements and omissions. In addition, a proof of claim which mirrored the lawsuit, was filed in the Bankruptcy Court on behalf of the Plaintiff class.
In January 1995, the Company, Defendants and the Plaintiff entered into a settlement of the lawsuit. The settlement provided for the Company's insurance company to pay $550,000 and the Company to issue $700,000 worth of new common stock on the POR effective date. The $700,000 worth of new common stock, 168,000 shares, was issued effective March 31, 1995 as part of the Company's emergence from the Chapter 11 proceedings. The Company's expense is included in the Provision for Facilities Closing and Other.
4. Provision for Facilities Closings and Other:
On November 11, 1993, the Board of Directors approved a plan to realign the Company's operations in an effort to improve the long-term profit potential of the Company. This realignment enabled the Company to concentrate its efforts on those stores that management believed provided potential for ongoing profitability. The Company closed 41, 5 and 2 stores in fiscal years 1993, 1994 and 1995, respectively. In October 1994, the Company opened one of the stores closed in the prior year.
The provision of $29.3 million recorded for the anticipated costs of the realignment consisted primarily of the expected costs of future lease obligations and rejection claims, losses on disposal of property and equipment, expenses and losses associated with the disposal of merchandise inventory in the closed stores and other expenses and losses directly related to the closure of the stores.
During 1994, the Company was unsuccessful in renegotiating its office and distribution center lease with its former landlord (See Note 9) and elected to reject the lease in its bankruptcy proceedings. As a result, the Company reallocated $7.8 million of the remaining reserve for the anticipated costs of rejecting the lease and relocating the corporate office and distribution center.
To date, the Company closed 47 stores and rejected the office and distribution center lease. The costs associated with the closing of the 47 stores and the rejection of the office and distribution center lease, including some future lease obligations, have been incurred during fiscal 1993, 1994 and 1995 and accordingly have been charged against the provision. During 1995, the Company settled the remaining disputes with its landlords for less than the amounts accrued and reversed the reserve by $0.9 million, which is recorded as a credit for facilities closing and other. During 1994, the Company negotiated favorable lease terms with its landlords on many of the remaining underperforming stores. As a result, the reserve was reduced by $1.8 million, which was recorded as a credit for facilities closing and other. As of February 3, 1996, the remaining reserve balance represents costs expected to be incurred in 1996 to complete the relocation of the Corporate office and distribution center, including the anticipated loss on disposal of equipment and leasehold improvements and other incremental costs.
In addition, during 1994, the Company entered into settlement agreements with certain of its creditors whereby early cash payments for approximately 25% of their legally allowed claim were made as full settlement of the Company's obligation, which resulted in a $1.6 million reduction in the provision for facilities closing and other. This amount, which is treated as forgiveness of debt, has been included as an extraordinary gain in the Company's Statements of Income (Loss).
The following table sets forth the facilities closing provision established in 1993 and the related subsequent activity:
Included in cash costs incurred in 1995 is $4,109,000 in lease rejection payments which is included in net cash payments on liabilities subject to compromise in the Statement of Cash Flows. Included in non-cash costs and asset write-offs is $4,109,000 in stock issued and $1,805,000 in New Notes issued as partial settlement of certain lease rejection claims. Included in other activity are the facility closing credit and reclassifications.
5. Asset Impairment Change:
During the fourth quarter of 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Statement requires companies to record impairments of long-lived assets, certain identifiable intangibles and goodwill when there is evidence that events or changes in circumstances have made recovery of asset carrying values unlikely. Asset impairment is determined to exist if estimated future cash flows, undiscounted and without interest charges, are less than the carrying amount. The Company identified assets in certain retail stores that were impaired because of a history of and projected future cash flow losses in these specific stores. An impairment loss of $687,000 was recorded for these retail store assets and is recorded in selling, general and administrative expense in the Statement of Income (Loss).
6. Liabilities Subject to Compromise:
As discussed in Note 1, the Company filed a petition on November 12, 1993 with the United States Bankruptcy Court seeking relief to reorganize under Chapter 11. The Court granted the Company's request and stayed the payment of prepetition liabilities with minor exceptions for ongoing payroll and employee benefits. These liabilities as of the Petition Date were recorded on the Balance Sheets as liabilities subject to compromise.
The liabilities subject to compromise consist of the following:
Pursuant to the POR, during 1995, the Company issued 4,735,000 common shares, issued approximately $12.4 million in original principal amount of six-year notes payable bearing interest at 12.75% annually and paid approximately $31,567,000 in cash as settlement in full for these claims and other amounts included as long term debt or accrued expenses at January 28, 1995. Included in selling, general and administrative expenses is a $592,000 credit, which represents the reduction in liabilities subject to compromise due to certain claims settling for less than the Company had accrued at January 28, 1995.
7. Long-Term Debt:
A summary of long-term debt is as follows:
On March 10, 1995, the Company entered into a three-year borrowing agreement with NatWest Bank N.A. and LaSalle National Bank (the "NatWest Facility") expiring March 31, 1998. The NatWest Facility provides the Company with revolving credit loans and letters of credit up to $40 million, subject to a borrowing base formula and lender reserves (as defined in the agreement). Undrawn and unreimbursed letters of credit under the facility may not exceed $4 million in face amount. During 1995, the maximum amount outstanding on the Revolving Credit Agreement was $10.3 million, while the average amount outstanding during the year was $3.4 million.
Loans under the NatWest Facility bear interest at NatWest's prime rate plus 1-1/4%, or, at the Company's option, the reserve adjusted LIBOR rate plus 2-1/2%. The interest is payable in arrears on the last business day of each month for prime rate loans and on the last day of the applicable one, two, three or six-month interest period or at the end of three months, whichever is sooner, for the reserve adjusted LIBOR rate loans. After March 31, 1996, the agreement provides for a potential decrease in interest rates depending on the financial performance of the Company (as described in the NatWest Facility). As of February 3, 1996, the NatWest prime rate is 8.50%.
As part of the NatWest Facility, the Company has entered into a two year Interest Rate Cap Agreement which provides for an 8.50% interest cap on 3 month LIBOR borrowings of up to $10 million.
The NatWest Facility carries commitment fees of .5% of the difference between $40 million and the average amount outstanding under the facility (including the face amount of letters of credit) and 1.75% of the face amount of outstanding letters of credit. This facility is secured by substantially all of the Company's assets.
The NatWest Facility contains, among other things, covenants with respect to (i) additional indebtedness, (ii) investments, (iii) capital expenditures, (iv) minimum net worth, (v) fixed charge coverage ratios, (vi) earnings before interest, taxes, depreciation and amortization, (vii) interest coverage ratios, (viii) inventory turnover ratios and (ix) prohibitions on paying cash dividends.
As described in Note 1, the Company issued to some unsecured creditors approximately $12.4 million in original principal amount of six-year notes bearing interest payable quarterly at 12.75%. The Notes were issued pursuant to an Indenture, dated as of March 1, 1995, between the Company and Shawmut Bank Connecticut, National Association. The Notes are payable in 16 quarterly installments of approximately $775,000 beginning July 1, 1997 and ending April 1, 2001. The Notes are also subject to prepayment within 50 days after the end of each fiscal year of the Company in an amount equal to the Company's "Excess Cash Flow". Excess Cash Flow is 50% of the Company's "Free Cash Flow" in excess of $1.4 million in 1995, $3.5 million in 1996, $3.4 million in 1997, $2.4 million in 1998, and $4.3 million in 1999. Free Cash Flow is the Company's net income before extraordinary items, plus depreciation expense, minus specified capital expenditures and principal payments made with respect to indebtedness for borrowed money (other than the quarterly payments with respect to the Notes and payments under the NatWest Facility). The Company has Excess Cash Flow of $455,000 for fiscal 1995. This amount has been classified as long term debt as the Company has both the intent and ability, through the NatWest Facility, to refinance these amounts on a long term basis. If Excess Cash Flow payments are not at least $2.25 million by March 31, 1997, the Company must pay the shortfall. The Company must also prepay the Notes with the proceeds of specified asset and securities sales.
The Notes are secured by a $5,000,000 life insurance policy on the life of a certain officer of the Company until the Notes are transferred to a third party. The Notes secured by the policy must be prepaid with any proceeds from the life insurance policy. The indenture contains, among other things, covenants with respect to (i) additional indebtedness, (ii) capital expenditures, (iii) minimum net worth, (iv) earnings before interest, taxes, depreciation and amortization, (v) interest coverage ratios, and (vi) prohibitions on paying dividends.
The amounts due on the Revolving Credit Notes payable due July 6, 1995 represented the allowed secured claim under the revolving credit agreement existing on the petition date and were paid in full pursuant to the POR.
8. Income Taxes:
The components of the provision (benefit) for income taxes are as follows:
The effective income tax rate varies from the statutory rate as follows:
Effective January 31, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". This resulted in a benefit of approximately $1.2 million being reported as a cumulative effect of change in accounting method in the fiscal 1993 Statement of Income (Loss). Prior to fiscal 1993, the Company accounted for income taxes in accordance with Accounting Principles Board Opinion No. 11.
SFAS No. 109 requires that deferred income taxes be recorded for "temporary differences" between the basis of assets and liabilities for financial reporting purposes and such amounts as determined by tax regulations. This method requires that deferred taxes be recorded based upon currently enacted tax rates.
Based on the Company's current financial status, realization of the Company's deferred tax assets does not meet the "more likely than not" criteria under SFAS No. 109 and accordingly a valuation allowance for the entire net deferred tax asset amount has been recorded.
The components of the net deferred tax asset (liability) and the related valuation allowance are as follows:
At February 3, 1996, the Company had net operating loss carryforwards available to offset future income for federal income tax reporting purposes of approximately $22,360,000, expiring in 2007-2010.
The Company's POR resulted in an ownership change under Section 382 of the Internal Revenue Code. Section 382 contains rules that limit the ability of a company to offset pre-ownership change net operating losses and credit carryovers against post-ownership change taxable income. Section 382(1)(5) allows certain companies to avoid the Section 382 limitation. However, under Section 382(1)(5) the net operating loss carryover as of the reorganization date is reduced by the interest expense deductible in the year of reorganization and three prior years on debt that is converted to stock and by 50% of the excess of the amount of debt converted to stock under the plan of reorganization over the fair market value of the stock.
The Company expects to elect Section 382(1)(5) treatment effective as of March 31, 1995. This election will be made on the 1995 corporate tax return and will reduce the net operating loss carryforward, by approximately $1.1 million.
Following the Company's election of Section 382(1)(5), any other Section 382 ownership change within a two year period following March 31, 1995, will result in the Company's inability to use its pre-March 31, 1995, net operating loss and credit carryforward to offset taxable income generated after March 31, 1995.
9. Leases:
The Company leases store locations, the corporate distribution center and office building and certain equipment from third parties. The remaining terms of these leases range from one to eleven years. Generally, the store leases contain provisions for additional rentals based on a percentage of sales. Total rent expense under these leases was approximately $15.0, $16.7 and $20.9 million in 1995, 1994 and 1993, respectively, which includes percentage of sales rentals of $0.1, $0.4 and $0.3 million, respectively. Accrued rent expense of $4.1 and $4.3 million at February 3, 1996 and January 28, 1995, respectively, is included in accrued expenses.
Pursuant to the POR, the Company rejected the lease for the distribution center and office building as of March 31, 1995. As settlement for the rejection, the Company paid the owner of the distribution center and office building $1.75 million in cash and $1.75 million in shares of new common stock. Also on the effective date, the owner of the distribution center and office building deeded in lieu of foreclosure, ownership of the property to the mortgage holder. The Company then entered into a 10 month lease that was subsequently extended for 6 months with the mortgage holder which will expire July 31, 1996, with base annual rent of $1,030,000 (including real estate taxes).
As part of the Chapter 11 bankruptcy proceedings, the Company rejected 47 store lease and assumed all the remaining store leases.
Estimated future minimum rental payments are as follows:
10. Stock Option Plans:
On March 20, 1986, the shareholders of the Company approved the Gantos, Inc. Stock Option Plan (the "Employee Plan") for officers and key management employees. The Employee Plan provides for granting of incentive stock options and non-qualified stock options which have an exercise price not less than the fair market value of the shares on the grant date.
On June 18, 1992, the Company's shareholders approved an amendment to the Employee Plan to increase the aggregate number of shares authorized for grant under the Employee Plan to 0.6 million shares from 0.3 million shares, to authorize the grant of stock appreciation rights and restricted stock, and to permit the acceleration of the exercisability of stock options and stock appreciation rights in certain circumstances.
As provided for in the POR, the Employee Plan was amended effective March 31, 1995, (i) to increase the number of shares reserved for issuance under the plan to 1,609,022 (including 53,220 shares subject to options exercised before March 31, 1995 and restricted stock awarded and not forfeited as of March 31, 1995), (ii) to permit options to continue to be exercised until their expiration dates after termination of employment, in certain circumstances, (iii) to provide that no participant may be granted stock options or stock appreciation rights to be awarded restricted stock as to more than 250,000 Common Shares in any fiscal year, (iv) to provide that the exercise price of nonqualified options may not be less than 100% of the fair market value of the shares underlying such options on the date of grant, and (v) to provide that the restricted period for restricted stock may be as little as zero days. Pursuant to the POR, as of March 31, 1995, all outstanding options were canceled.
Pursuant to the POR, options to purchase 592,500 shares at an exercise price of $4.16 were granted on March 31, 1995. Currently, outstanding options granted under the Employee Plan become exercisable within three years of the grant date and expire ten years after the grant date, or, if earlier, upon termination of employment, with certain exceptions. The Company also awarded 200,000 restricted shares. The restricted shares vest in one-third annual installments beginning March 31, 1996, and are subject to certain restrictions or forfeiture. The compensation expense related to the awarding of the restricted stock is recognized ratably over the restriction period. The number of shares available for grant at February 3, 1996 was 861,802.
The Employee Plan will expire March 19, 1996, and no stock options, stock appreciation rights or restricted stock may be granted or awarded after March 19, 1996 under that plan. The termination of the Employee Plan does not affect the validity of any stock option, stock appreciation right or restricted stock which is outstanding on March 19, 1996.
In addition, on June 18, 1992, the Company's shareholders approved the Gantos, Inc. Director Stock Option Plan (the "Director Plan") which provides for automatic granting of up to an aggregate of 100,000 shares of non-qualified options to certain directors of the Company who are not officers or employees of the Company. Options granted under the Director Plan become 100% exercisable on the grant date and expire ten years after the grant date, or, if earlier, three months after resignation, with certain exceptions.
Pursuant to the POR, all options outstanding prior to March 31, 1995, were canceled. However, the POR provided for the granting of 40,000 options at $4.16 per share as of March 31, 1995. Options to purchase an additional 2,000 shares were also granted during 1995 at an exercise price equal to the market value of Company common stock at the Grant date. The number of shares available for grant under the Director Plan at February 3, 1996 was 58,000.
A summary of activity for the year ended February 3, 1996 is as follows:
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based Compensation" which established new accounting and reporting requirements for stock based employee compensation. As permitted by the statement, the Company will continue to account for such plans under APB Opinion No. 25, but will make required additional disclosures beginning in 1996, including proforma information.
Quarterly Financial Information (Unaudited):
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Each Management contract or compensatory plan or arrangement filed as an exhibit to this Report is identified in the following list with an asterisk before the exhibit number.
2.1 Second Amended Joint Plan of Reorganization of Gantos, Inc. N/A and Gantos Stores, Inc., incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, dated March 7, 1995 and filed with the Securities and Exchange Commission on March 22, 1995. A list of the omitted exhibits is contained on page vii of the Plan. Gantos, Inc. will supplementally furnish a copy of any omitted exhibit to the Securities and Exchange Commission upon request.
2.2 Modifications to the Debtors' Second Amended Joint Plan of N/A Reorganization, incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K, dated March 7, 1995 and filed with the Securities and Exchange Commission on March 22, 1995.
2.3 Agreement of Merger, dated as of March 15, 1995, between N/A Gantos Stores, Inc. and Gantos, Inc., incorporated by reference to Exhibit 2.3 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
3(i) Restated Articles of Incorporation, incorporated by reference N/A to Exhibit 4.1 to the Company's Current Report on Form 8-K, dated March 7, 1995 and filed with the Securities and Exchange Commission on March 22, 1995.
3(ii) Bylaws, as amended March 16, 1993, incorporated by reference N/A to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1993.
4.1 Long-term debt documents, see Exhibits 10.20 through 10.21 N/A of this Form 10-K.
4.2 Form of Indenture between Gantos, Inc. and Shawmut Bank N/A Connecticut, National Association, as Trustee, including forms of notes attached as exhibits, a reasonable itemized table of contents and a cross-reference sheet showing the location in the Indenture of the provision inserted pursuant to Section 310 through 2318(a) inclusive of the Trust Indenture Act of 1939, incorporated by reference to Exhibit T3C to the Company's Application for Qualification of Indenture under the Trust Indenture Act of 1939 on Form T-3.
10.1 Lease Agreement, dated effective April 1, 1995, between N/A Gantos, Inc. and VRB Corp., concerning office-distribution center, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 29, 1995.
10.2 Amendment to Lease Agreement between Gantos, Inc. and VRB N/A Corp., dated as of April 28, 1995, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 29, 1995.
10.3 Agreement and Release, dated as of April 28, 1995, among N/A Comerica Bank, Gantos, Inc., Four 'D' Investment Company, Kathy Tann Gantos, and L. Douglas Gantos, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 29, 1995.
10.4 Notice of Option to Renew Lease Agreement between Gantos, N/A Inc. and VRB Corp., dated October 30, 1995, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended October 28, 1995.
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10.5 Form of Gantos, Inc. credit card application and agreement, N/A incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended October 28, 1995.
10.6 License Agreement, dated as of October 15, 1982, as amended N/A by amendments one through four, between Gantos, Inc. and Sherman and Sons, Inc., incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended January 30, 1988.
10.7 Fifth Amendment, dated as of May 31, 1989, to the License N/A Agreement dated as of October 15, 1982, as amended, between Gantos, Inc. and Sherman and Sons, Inc., incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended February 3, 1990.
10.8 Sixth Amendment, dated as of June 30, 1992, to the License N/A Agreement dated as of October 15, 1992, as amended, between Gantos Stores, Inc. and Sherman and Sons, Inc., incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1992.
*10.9 Gantos, Inc. Amended and Restated Stock Option Plan, N/A adopted March 20, 1986, as amended and restated March 31, 1995, incorporated by reference to Exhibit 1 to L. Douglas Gantos' Schedule 13D, dated March 31, 1995 and filed with the Securities and Exchange Commission on April 10, 1995.
*10.10 Gantos, Inc. 1996 Stock Option Plan, adopted March 19, 1996. --
*10.11 Gantos, Inc. Amended and Restated Director Stock Option Plan, N/A adopted March 17, 1992, as amended and restated March 31, 1995, incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
*10.12 Gantos, Inc. Employees' 401(k) Plan, effective July 5, 1992, N/A incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1992.
*10.13 First Amendment, dated as of July 19, 1993, to the Gantos, N/A Inc. Employees' 401(k) Plan, effective July 5, 1992, incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1993.
**10.14 Second Amendment, dated as of July 15, 1994, to the Gantos, N/A Inc., Employees' 401(k) Plan, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, for the quarter ended July 30, 1994.
*10.15 Third Amendment, dated as of May 3, 1995, to the Gantos, Inc. N/A Employees' 401(k) Plan, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 29, 1995.
*10.16 Fourth Amendment, dated as of January 24, 1996, to the -- Gantos, Inc. Employees' 401(k) Plan.
*10.17 1995 Gantos, Inc. Executive Bonus Plan adopted January 10, N/A 1995 as amended and restated March 14, 1995, incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
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*10.18 1996 Gantos, Inc. Executive Bonus Plan, adopted -- March 19, 1996.
*10.19 Gantos, Inc. Master Severance Plan and Key Employee Retention N/A Bonus Program adopted January 11, 1994 as amended March 15, 1994, incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994.
10.20 Revolving Credit Agreement, dated as of March 10, 1995, among N/A Gantos, Inc., NatWest Bank, N.A., LaSalle National Bank and NatWest Bank, N.A., as agent, incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
10.21 Forms of note, Security Agreement, Security Agreement and N/A Mortgage -- Patents and Trademarks, and Assignment of Life Insurance Policy as Collateral Security, all in connection with the Revolving Credit Agreement, dated as of March 10, 1995, among Gantos, Inc., NatWest Bank, N.A., LaSalle National Bank and NatWest Bank, N.A., as agent, incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 29, 1995.
10.22 Termsheet for Settlement of Comerica/Four "D" Investment N/A Company Issues, dated as of February 14, 1995, incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
*10.23 Letter of employment, dated December 13, 1993, between N/A Gantos, Inc. and J. E. Bunka, incorporated by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994.
*10.24 Letter of employment, dated September 20, 1994, between N/A Gantos, Inc. and Mr. Joseph Corso, Vice President -- Store Operations, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended October 29, 1994.
*10.25 Letter of employment, dated November 2, 1994, between Gantos, N/A Inc. and Mr. Gordon Tendler, Vice President, General Merchandise Manager for Sportswear, Coats and Suits, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended October 29, 1994.
*10.26 Letter of employment, dated March 27, 1995, between Gantos, N/A Inc. and Mr. L. Douglas Gantos, President, Chief Executive Officer and Chairperson of the Board, incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
*10.27 Amendment to Letter of Employment, dated as of March 19, 1996, -- between Gantos, Inc. and L. Douglas Gantos.
*10.28 Letter of employment, dated March 15, 1996, between Gantos, -- Inc. and Mr. Anthony Barnett, Vice President of Store Operations.
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*10.29 Severance agreement, dated as of January 23, 1995, between N/A Gantos, Inc. and Mr. J.E. Bunka, incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
*10.30 Severance agreement, dated as of January 31, 1995, between N/A Gantos, Inc. and Mr. Kenneth Green, incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
*10.31 Severance agreement, dated as of January 23, 1995, between N/A Gantos, Inc. and Ms. Jane Pahls, incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
23.1 Consent of independent accountants. --
27.1 Financial Data Schedule --